06 Nov Money Matters: Don’t Hit the Panic Button!

Here’s how to understand the recent rise in interest rates—and navigate the impact of inflation on your pocketbook

By Sheryl Nance-Nash

The Federal Reserve announced a rise in interest rates in late July, after having hit the pause button in June on raising rates. The Fed also hinted that there could be more hikes before year-end. Fueled by the need to tamp down inflation, the Federal Reserve has pushed up rates 11 times since March of 2022. Over that period, it has raised rates by 5 percent—the fastest cycle in history.

Interest rates are at their highest since 2001, elevating borrowing costs to a 22-year high. According to the Fed’s recent statement, the overarching goal is to return inflation to the Fed’s 2 percent objective. Inflation has softened from a high of 9.1 percent in the summer of 2022, but the pain has not been completely alleviated, as anyone who’s been to the grocery store knows.

For sure, high interest rates are likely to continue to be a topic of discussion, as there may not be significant downward trends until the end of 2024 or early 2025.

Keep your seat belt on and drive carefully through the continued high-interest-rate environment. Knowing how to navigate the terrain is critical for your financial success. Some experts weighed in on how to make the most of your money, and the mistakes to avoid when interest rates are high.

Seize fixed-income opportunities

High interest rates can be a boon for fixed-income investments like bonds (government, corporate, or high-quality bond funds) and CDs, allowing you to increase the
return on your savings. “They offer attractive yields and provide a steady income stream. Consider diversifying your portfolio with these options,” suggests Michael Ryan, personal finance coach and founder of financial literacy
website .

Think short- and medium-term though. Avoid long-term bonds that offer fixed interest rates and impose high penalties on premature withdrawals. Increase your positions in short- or medium-term investments. “Pair short-term bonds with floating-rate debt instruments and Treasury Inflation-Protected Securities, because the adjustable rate is comparatively less sensitive to rising interest rates,” says Wayne Bechtol, a senior tax accountant with personal loan marketplace .

Scott Custis, a certified financial planner at Money Scientific, a registered investment advisor firm, says his fixed-income investment choice for clients is shortterm (three- to six-month) Treasury bills. In an environment in which interest rates are expected to rise, short-term bonds are most effective, he says. “If new T-bills are being issued at 5 percent, and three months later, they’re expected to be at 5.25 percent, we reinvest at the higher rate when the T-bill matures. In academia, T-bills are considered the risk-free rate of return. You’re guaranteed your principal and interest are backed by the US government,” he says.

However, make sure these options align with your financial goals and liquidity needs, points out Lauren Mendoza, cofounder of Bank Standard, a small-business lender. To find the best solutions, evaluate several financial institutions and compare their interest rates.

Rethink purchasing big-ticket items

When interest rates are high, it might not be the best time to make major purchases that you’ll need financing for, such as a new car or home. “High interest rates can make borrowing substantially more expensive, raising monthly payments and overall costs,” says Tracy Cauley, a chartered financial analyst with VEM Medical.

Patience can pay off. If you wait for interest rates to fall, you could save significant sums of money over the longer term with the lower rates.

However, if you must take on debt for a major purchase, shop around for the best possible interest rates. You can always consider refinancing down the line, when interest rates might be lower. “It’s also important to focus on improving your credit score and lowering your debt-to-income ratio in order to secure the best possible interest rates for the time,” says Carter Seuthe, CEO of Credit Summit.

Prioritize debt repayment

High-interest rate periods are a good time to pay down high-interest debt. “Focus on debts with the highest interest rates, such as credit card balances, to reduce interest expenses and improve your financial standing,” says Ryan. When interest rates are high, more of your payment goes toward interest rather than principal reduction.

Understand how high rates impact the stock market

Rising interest rates can have an impact on the stock market, causing volatility. “Investing in long-term, stable options such as blue-chip stocks or index funds can help reduce the risks associated with short-term fluctuations,” says Young Pham, cofounder and the CMO of Bizreport.com, a business and finance website.

Capitalize on assets that thrive during high interest rates

If you have the financial wherewithal, it may be an ideal time to invest in real estate or other assets, since their prices tend to decrease when borrowing becomes more expensive. “However, it is vital to conduct thorough research and analysis to make informed investment decisions,” says Paul Martinez, founder of , a provider of information about starting, building, and growing e-commerce.

What not to do

Don’t panic.

One pitfall to avoid is rushing into fixed-rate mortgages or loans just because the rates are high—though it might seem like a good idea to lock in a rate before it increases further. This can backfire. “Many people learn this the hard way, only to watch rates fall a year later,” says Johannes Larsson, founder and CEO of Financer.com, a provider of financial comparison services.

When interest rates are high, avoid getting caught in the trap of risky investments that promise high returns. Remember the saying “If it’s too good to be true, it probably is”? Keep that in mind. “Interest rates are cyclical, and what goes up must come down. I’ve seen too many people make rash decisions based on short-term interest rate spikes, only to regret it when the rates stabilize again,” says Dennis Shirshikov, a professor at the City University of New York who teaches finance, economics, and accounting.

Don’t use your credit card frivolously

Be cautious about relying heavily on credit cards during high interest-rate periods. Accumulating credit card debt can quickly become overwhelming, so spend within your means and avoid carrying high-interest balances.

Stay on top of adjustable-rate loans

If you have an adjustable-rate loan, be on the lookout for potential interest-rate increases. Be proactive by evaluating the impact on your monthly payments and consider refinancing or adjusting your loan terms to mitigate risks. “Keep track of any adjustments to your interest rates and plan your budget accordingly,” says Percy Grunwald, cofounder of , a financial comparison website.

Keep your eyes on the prize

Don’t neglect savings and emergency funds. “It’s crucial to maintain an emergency fund regardless of the interest-
rate environment. Avoid neglecting your savings or using them to chase higher returns. Having a financial cushion will protect you in case of unexpected expenses or changes in circumstances,” says Grunwald.

Leave timing to destiny

Forget trying to predict interest-rate movements. Basing investment decisions solely on rate fluctuations is a risky endeavor. “Instead, focus on your long-term financial goals, diversify your investments, and consult with a trusted financial advisor for personalized guidance,” says Michael Ryan.

Navigating high interest rates can feel like walking a tightrope, but with the right strategies, you can make the most of your money. DW

Sheryl Nance-Nash is a freelance writer in personal finance, business, travel, and lifestyle topics. Her work has appeared in Money, the New York Times, the Wall Street Journal, and Newsday, among other publications.