A Guide To Interest Rates and “Free Money”

by | Oct 16, 2023 | Market Commentary, Market Performance

Interest rates have increased sharply the past several years. It’s hard to escape this news. Everyone on the street seems aware of higher mortgage rates, and they are starting to recognize how rising interest rates are changing savings rates at the bank. It’s one thing to hear this news, but it’s another to know exactly how these changes impact our daily financial lives.  I’ve been having more frequent conversations regarding interest rates and how these increases are affecting how we should manage our debt and savings.

From 2021 to present the federal funds rate has increased from close to zero to 5.38%. We haven’t seen rates this high since prior to 2001 (twenty years ago). For many investors and borrowers this level of rates has not been experienced at all in their adult lives. Forecasts currently anticipate this rate falling in the near future. This only happens if we start to see inflation slow closer to 2.0%.

What does this mean for investors? Now that rates have changed, investors need to pay special attention to interest rates on savings and debt. There are ways investors can take advantage of this rate change. I am calling these interest rate opportunities “free money”. If you are paying attention to these rates and making shifts to take advantage of them, “free money” can be yours. A couple key examples are below:
 
Savings – Many banks are offering Certificate of Deposit(CD) rates around 5%. Savings accounts are paying a little more than recent years, however these rates are still closer to 0%. Shifting $10,000 in savings that investors’ don’t need for the next year from savings to a CD can provide the following in free money:
 
            $10,000 Savings Free Money = $500 per year
 
Debt – The average credit card interest rate has risen from 14.58% in 2020 to 28.10% on October 9, 2023.  This change equates to $1,352, or approximately $112 per month, additional interest paid per year on $10,000 in credit card debt. That equates to $1,352 in “free money” for the bank. I really hate giving free money to the bank. I’d prefer to find free money for investors. There are still zero interest credit card offers available. Please search for these offers and transfer funds. While the money is at zero interest rate pay down debt as aggressively as possible.
 
            $10,000 Shifted from interest credit card to zero interest card Free Money = $2,810 per year
 
Taking advantage of different interest rates can equate to significant savings. But, not paying attention to what is being paid in interest on debt can be very costly. Sometimes the best investment decisions have nothing to do with picking the right stock. Higher interest rates create a huge opportunity to find free money. Use it to your advantage!

Performance Source: Koyfin Price Performance, not Total Return