How to Take Advantage of High Interest Rates to Reach Financial Goals
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Here's your money briefing for Monday, September 11th. I'm J.R. Whelan for The Wall Street Journal. Higher interest rates might make a lot of things we buy more expensive, but they can also help pad your bank account with extra money, even if you're carrying debt and are tight on cash.
Still flex that muscle of putting away as little as you can month over month, because you'd be surprised once you hit zero on your debt, how much money is left over to start that emergency savings fund.
We'll talk with WSJ personal finance reporter Oyen Adedoyen after the break.
Listen at schwab.com slash washingtonwise.
Rising interest rates can help consumers reach their financial goals no matter their income level. Wall Street Journal personal finance reporter Oyen Adedoyen is here to discuss. So, Oyen, we talk about interest rates a lot on the show, especially how they've been on the rise over the past year, and they're expected to remain high for the foreseeable future. It's sort of a good news, bad news story, right?
It's definitely a double-edged sword for sure. For example, rising rates make mortgages and credit card bills a lot more expensive, but they make savings accounts more attractive. Taking out a $500,000 mortgage to buy a home right now is going to cost you about $400 more a month than it would have a year ago.
How do rising interest rates create opportunities for consumers?
Although, on the flip side, savings accounts like CDs or high-yield savings accounts are yielding upwards of 5%.
Yeah, let's talk about ways that people can take advantage of higher rates. A lot of Americans are living paycheck to paycheck, and they may not have enough cash to take advantage of rates. But what if financial experts say are the moves they should make to take advantage of these rates that are a lot higher than they were a year ago?
Paying down that credit card debt is a first priority. The average debt holder is paying over 22% interest on their debt right now. And according to recent surveys, that's about 50% of people that are rolling over that credit card debt month over month.
Yeah, the credit card debt can really tear a hole in people's finances if they don't pay down their balances and pay them down on time. Some people avoid that by using debit cards tied to a checking account. How can they use that arrangement to their benefit?
Debit cards can be linked to high-yield checking accounts, which are offered by online banks and credit unions and are yielding, I've seen them as high as 6% right now. So people who are avid debit card users can find some ways to get high interest out of that.
Now, somebody who doesn't have a lot of extra cash to put into a savings account might say, is it worth it for me to put money away? But do financial experts say it is worth it?
They say to still flex that muscle of putting away as little as you can month over month because you'd be surprised once you hit zero on your debt how much money is left over to start that emergency savings fund.
So what are some numbers here? If you put a little bit away, how will that help you?
If you put about $25 away each month in a high-yield savings account yielding, let's say, 4.5%, for example, you're going to make more than $300 in a year. That might not sound like much, but that also includes added interest that you didn't have to work for.
Now, you spoke to people who put away small amounts of money. What did you learn from them about that experience?
I learned that there are almost different levels that we categorize in our heads when it comes to creating an emergency savings fund. So financial advisors say you should keep anywhere from six months to a year of expenses in that fund. But for some people, that might look differently month to month. So anywhere from zero to $1,000, being able to figure out where you are in that range can really contribute to an emergency fund that works best for you.
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