Protecting Your Finances Amid Rising Interest Rates
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Here's your Money Briefing for Thursday, June 16th. I'm J.R. Whalen for The Wall Street Journal. The Federal Reserve is stepping up its efforts to tame inflation, approving a three-quarters percentage point interest rate increase yesterday. And while that's meant to help bring soaring prices down, higher rates could also lead to some hard financial decisions.
people are really scared. They're afraid of inflation. They're afraid of the threat of a recession. So they're worried that they're going to need that money, that cash that they're holding on to. Makes them reluctant to dip into their savings or other funds to pay down their debt.
Coming up, our personal finance reporter Julia Carpenter will discuss how the Fed's decision to raise rates could change the math for all sorts of financial decisions you make this year. That's after the break.
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The Federal Reserve raised interest rates by three quarters of a percentage point yesterday, the biggest increase since 1994. And with additional rate hikes likely before the end of the year, what adjustments should you make now to protect your personal finances? And what does it mean if you're thinking about borrowing money this year, say, for a house or a car? Wall Street Journal personal finance reporter Julia Carpenter has been speaking with experts about that, and she joins us with some answers. Hey, Julia, thanks for being here.
Thank you for having me.
So Julia, the Federal Reserve raised interest rates by 0.75 percentage points yesterday. In basic terms, what does that actually mean?
When the Fed raises rates, it makes it more difficult for banks to lend money to each other, which in turn can make it more difficult for consumers to borrow.
All right, so let's talk more about that and specifically different kinds of debt that people hold. If I've got debt to pay down, how do rising rates change the math for what I should focus on?
So higher interest rates means the cost of borrowing goes up and you can usually see this when credit cards then raise annual percentage rates. So that means that it's more expensive to carry a balance on your credit card. You'll be charged more interest for that balance. Financial advisors as a result recommend that you order your debt payments by paying the highest interest rate debt first. That way, you're knocking that out and able to order your payments to the next highest interest rate, then the next highest, and making sure that you're saving yourself money along the way.
But you know, Julia, inflation is also rising, and that's hitting consumers with a one-two punch. That might make them a little gun-shy about taking aggressive steps now to pay down debt. What do the experts you've spoken with say about that?
You know, I spoke with one financial advisor who said he meets people who have $200,000 in the bank, but $20,000 in debt. And they're really reluctant to take some of that $200,000 and use it to pay off that $20,000.
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