Should You Alter Your Wealth Management Plan When Interest Rates Change?

Within our comprehensive wealth management process, we consistently monitor the interest rate environment, among other areas, and how shifting interest rates can affect a client’s total financial picture. So, what should you do when interest rates go up or down? Making changes to spending and investing often depends on various factors, including your debt and needs. We’ll explain how interest rates may affect you and common scenarios we help clients navigate.

How Do Rising Interest Rates Affect My Investments?

Interest rate changes often affect the bond and debt market, with potential benefits for investors and drawbacks for borrowers. Still, there’s a balance to consider when determining what’s best for you. Regardless of the current interest rate environment, we always monitor your individual situation to identify challenges and opportunities. Here are a few of the questions we help clients navigate:

Should I Pay Off Debt or Invest Assets When Interest Rates Rise?

Deciding whether to pay off debt or invest while interest rates and potential yields are high depends on cash flow and financial priorities. Advisors can help balance potential growth and risks. Here are some things to consider:

• Financial Peace of Mind Matters: Is debt a considerable stress point, and is there flexibility to pay toward it? Some clients may prioritize paying it down for emotional relief if it won’t deplete their savings or cause cash flow issues. In certain cases, the feeling of becoming debt-free may outweigh the benefits of investing.
• Compare Rates: How does the interest rate on the loan compare to the investment’s rate of return? For example, investing might be favorable if a loan’s interest rate is 3%, but an investment can earn 6% or higher.

How Do Rising Interest Rates Affect Large Purchases?

Rising interest rates can be less appealing to borrowers planning a large purchase like a home or car. Many wonder if they should use capital from their investments rather than secure a loan for these purchases. Consider these questions:

• Again, Compare Rates: How does the interest rate on a home or car loan compare to the potential rate of return on your investments or savings? Like how we assess paying off debt, you must consider this balance and if keeping funds invested or paying cash to avoid costly interest payments is suitable for you.
• Ownership vs. Leasing: How long will you keep your car? Considering how long you’ll be in the vehicle is critical to understanding if a lease or purchase is best and how much you’ll pay over time. Think about this:
  • Monthly lease payments are often less than loan payments, giving borrowers more flexible options to upgrade in a few years rather than locking into a high rate for longer.
  • However, purchasing might make more sense if the car will be driven beyond 100,000 miles. While interest will be higher, a longer loan term may help spread out payments, benefiting cash flow while building equity.
• Variable vs. Fixed Rate Loans: Choosing a suitable loan structure is another consideration during a shifting interest rate environment.
  • Fixed-rate loans offer the same interest rate for the loan’s term. Clients may find the stability these loans provide attractive, especially if interest rates are expected to rise.
  • Variable-rate loans change with the market. They may offer a lower initial rate while interest rates are high, but there is a potential for rising costs over the loan’s term.

Should I Change My Spending When Interest Rates Rise?

Spending and budgeting are other areas that can be affected when interest rates rise, particularly with credit card interest on standing balances.

• Ideal Spending Rate: Living within a specific budget is important, as failing to do so can jeopardize retirement savings and end-of-life planning.
  • An ideal budget includes a “safe” annual spending percentage for available assets. For example, you may decide to spend 8% of your assets. However, if your investments only earn 6%, you may run out of critical savings sooner than if you stayed below 6%.
  • Overspending or depleted funds can accumulate more credit card debt, which could become even more expensive as interest rates rise. Periodically assessing or adjusting spending strategies is essential for cash flow management.

What to Consider When Interest Rates Go Down

Conversely, when interest rates go down, there are considerations and opportunities. We’ll review the same scenarios outlined above:

• Investments: With lower returns on savings, investors may consider transferring unneeded funds into investments with the potential for higher rates of return.
• Debt Management:
  • Consolidating debt at a lower rate may help streamline payments and manage debt more efficiently.
  • Refinancing debt at a lower rate may help reduce monthly payments or overall interest costs over time.
• Large Purchases:
  • Securing a low fixed-rate loan for a home or car is another way to potentially reduce borrowing costs during a low-interest-rate environment.
  • When rates are low, purchasing a car becomes more appealing for long-term ownership, while leasing has fewer benefits.
  • Spending & Budgeting: With potentially lower borrowing costs and monthly payments, some people may reassess freed-up funds to prioritize debt management, saving, or investing.

Changing Interest Rates and How Monarch Helps

As you can see, interest rates may significantly impact various areas of your financial life — from credit card debt and large purchases to investments. Before making drastic changes, we recommend consulting with an expert who can help offer clarity and forecast customized scenarios. At Monarch, we look at your full financial picture, tending to favor small, consistent adjustments and a long-term approach rather than major course corrections based on external factors.

We can help ensure every change aligns with your goals and needs. Contact us if you have questions or need help staying on track, no matter the state of the markets.