The most common question we get: “Where should I invest my money right now?” If there was a sure-fire answer, we’d tell you and that would be that. However, this question is tricky because timing is critical and can make all the difference.
The interest rate cycle, or simply the “rate cycle”, refers to interest rates moving up and down. Interest rates on what, you ask? Things like bonds and bank accounts that pay interest. These investments earn more when interest rates are high… which should make sense. If you had $1,000 in a savings account that paid 4% and earning you $40 a year, it’s going to earn more than a $1,000 in a savings account paying 3%, which earns you $30 a year. Conversely, things like mortgages, car loans, credit cards, and student loans have interest rates too. Unlike investments though, when interest rates are high, loans and credit cards get more expensive. Think about it this way: would you want the interest rate on your car loan to be 6% or 2%? Easy answer.
What causes interest rates to move up and down in a “cycle”? The Federal Reserve has the primary influence on interest rates and makes their decisions based on whether the economy is doing great or poorly. This mostly relates to inflation, which is a way of saying how expensive things are… like groceries, fuel, housing, etc. If inflation is high, interest rates are usually rising or high; if inflation is low, interest rates are probably low or falling. Interest rates are low most of the time, because ongoing inflation isn’t great for people like us.
Why does this matter to investors? Because, as we mentioned above, investments can be affected by interest rates both positively and negatively. For example, I-bonds are a great investment when interest rates are high. So are simple savings accounts, money market accounts, and CDs – which all make a fantastic spot for your emergency fund by the way. Some investments do a little better when interest rates are low, like stocks and real estate.
So you see, investment performance can depend a good bit on the interest rate cycle. Stick with us and we’ll help you find the best investments at the best time to guide you to financial independence!
For lots more on how to crush the personal finance game and find early retirement, make Firreo your financial advisor. We’ll help you out of your job and on your way to financial freedom!