Note: a few weeks ago I mentioned the 1% student loan autopay discount deadline to enroll was September 30. The Department of Education moved it to December 31. So if you’re paying off loans, take advantage!
Live: Rates Rise Higher Than Your Jeans
Four weeks ago I mentioned the central bank of the United States (AKA the Fed) would probably raise interest rates.
Not to brag (this was a very popular opinion), but they did.
Giphy, Yeah, I stand on business on popular opinions most people support. No big deal.
Inflation is the driving force behind the rise.
Prices across all products rose 3.4% in a year (updated numbers come out tomorrow). So the Fed is hoping to reduce inflation through this rate hike.
So what?
While the Fed's interest rate seems abstract, it affects you in a lot of ways.
Everything from new student loans, to credit cards, to a potential mortgage, gets more costly.
Essentially, the cost to borrow money has gone up.
But here's what that means in more material terms...
Learn: Every Way a Rate Hike Affects You
Instead of talking about rate hikes in the vague sense, these are all the ways a hike may affect you positively or negatively.
1. Your credit card costs more
Credit card interest rates follow the Fed's, though the interest rates themselves are in the 20s instead of the 3-4%.
So if you don't pay down your credit card in full every month, the extra balance will grow at a faster rate.
Which I'm sure is just what you needed.
Giphy, The Fed raising interest rates on your broke-ness.
But! If you pay your full statement balance every month this has no effect. There is no balance to grow with interest.
You can forget about it.
If you carry a balance, reducing it should be one of your first financial priorities.
2. Your next student loan costs more
Your current loans are locked as is, but new loans will reflect the raised rates.
Every spring the government sets the rate for the coming school year, and it's based on the return you would get from the 10-year Treasury rate (which tends to move with the Fed's rate).
Note: the 10-year Treasury rate is the return you get for loaning money to the government for 10 years. This is typically lower than the return you would get for stocks, but thought of as a safer investment.
This year's rate on student loans is 6.52%. If the "10-year" stays where it is right now, next year's will be closer to 7.3%.
On a $5,500 loan, that's about $260 extra over ten years.
Note: private student loans can have rates that change with the market. If you have one, check your loan agreement for the word "variable."
3. Your savings account should pay more
When the Fed raises rates, banks can afford to pay you more for your sitting balances (like High-Yield Savings Accounts AKA HYSAs).
Some will take their sweet time raising though. So beware of that.
Wealthfront, which I use, went up to 3.55% two days after the hike.
Here's what a few were paying on October 12:
Where your money sits | What it pays |
|---|---|
Average savings account | |
Capital One 360 | |
Marcus | |
Wealthfront |
Inflation is 3.4%. So open your banking app and check your APY (what the bank pays you).
If it's under 3.4%, your cash is losing a foot race to a carton of eggs. As in your money is losing value faster than it's growing in your account!
Your money should earn you money while it sits, and preferably not lose value to inflation. Get an HYSA if you don't have one already!
4. Also pricier, but probably not your problem yet
Mortgages: the average is 7.40%, the highest since 2023. If you're buying a house at some point soon, honestly congratulations is all I have to say. And ouch. But congrats!
Car loans: about 7.5% on a new car, though it varies with your credit score (higher the credit score, lower the interest rate).
Stocks: higher rates make them jumpy, and inflation makes the return on your money less powerful. That said, if you're investing for decades, do nothing.
Jobs: companies borrow less when it costs more, so hiring can slow. Though I really need it to not.
Leverage: Treasury Bills
A Treasury bill (T-bill) is a loan you make to the US government.
Think of it as Venmo-requesting the government for those weapons you helped them buy, except they pay you back on time, with interest.
You pick a length from 4 to 52 weeks, and you buy the bill for a bit less than it is worth.
The government gives you the full worth back at the end of the term, and you pocket the difference as the interest you made given you didn't have to remove any kneecaps.
For the most recent 1-year T-bill, that was about $956 in and $1,000 out, or about a 4.6% return on your loan.
Here's what $1,000 earns in a year:
Where it sits | Rate | You earn |
|---|---|---|
Average savings account | 0.37% | About $4 |
Wealthfront | 3.55% | About $36 |
1-year T-bill | 4.6% | About $46 |
You can buy one at TreasuryDirect.gov starting at $100, or through a brokerage like Fidelity or Schwab.
Pros:
Pays more than the savings accounts above, and more than inflation.
You're lending to the people who print the money, so it's considered quite safe.
No state or local tax on the interest, unlike HYSAs.
Starts at $100.
Cons:
Your money's locked until the term ends.
The win is small on student money. Your earnings over what you'd be making in an HYSA are low.
TreasuryDirect looks like it was built in the 80s by someone on coke.
And the usual reminder that I am not sponsored by anything I put in here. Definitely not the US government.
Launch!
Open your banking app and find the APY on your savings account.
If it's under 3.4%, inflation is outrunning your money. Open an HYSA, or put that cash in a T-bill!
When rates go up, so should your standards honey. ;)
Gif by hbomax on Giphy, Me when the Federal Reserve interest rates go up.
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