SOC_13_WTFinance is happening with inflation_1280x720_07.jpg

Everyday Finances

WTFinance is happening with inflation and what does it mean for your budget?

May 11, 2023

MirandaMarquit_9483sm-e1587573873989.webp

Written by

James-Heflin.jpg

Reviewed by

Inflation is a complex topic, but it boils down to one idea most of us already know: things cost a lot more today than they did just a couple of years ago. At the same time, wages aren't a lot higher than they were a couple of years ago. 

Let’s talk about inflation, how it’s managed by the Federal Reserve, and how it impacts your budget—and your wallet.

What is the Fed interest rate?

The Federal Reserve is the central banking system of the U.S. It’s where money policy is created to promote economic growth. 

When the talking heads on TV mention the Fed interest rate, they’re referring to what’s called the Fed Funds rate. This is a baseline rate that banks can use when they lend money to each other. It’s sometimes called a benchmark. 

In the last year, the Federal Reserve has increased interest rates several times (aka “rate hikes”)—and it might do so again in 2023. This matters because the cost to banks is usually passed on to consumers, to you, in different ways.

The Fed interest rate and inflation

A Fed rate hike is usually made in response to inflation. It’s an attempt to slow inflation—to keep prices from skyrocketing. 

Here are two main ways the Fed deals with money policy through its benchmark interest rate.

  • The Fed wants to encourage money to move through the system when inflation is low. That means that when the benchmark rate is low, borrowing money is cheaper and spending is higher. Banks, businesses, and consumers are all willing to take on more debt—and spend more—when borrowing is cheap. When money moves through the system, we feel more comfortable making purchases like TVs and cars. We’re more willing to eat out. These activities also support jobs, so more people have money to spend.

  • But when inflation is on the rise, usually above 2%, the Fed hopes to slow it down. So they meet and decide on a rate hike. This makes borrowing more expensive. When fewer people borrow to make purchases, demand drops. Hopefully, the result is that prices either drop or at least stop rising. 

What happens to your wallet is the result of these moves.

SOC_13_WTFinance is happening with inflation_1280x720_05.jpg

How a Fed rate hike hits your wallet

Inflation is all about the prices you pay for goods and services. We’ve all experienced inflation at the grocery store. Remember when eggs suddenly spiked in price?

The Fed’s response to inflation, a rate hike, hits you in the wallet because debt becomes more expensive. If you have any type of debt, or if you need to get a loan, it’ll cost you more because of the Fed rate hike. You’ll likely find that lenders are charging higher rates on:

  • Credit cards

  • Personal loans

  • Car loans

  • Home equity lines of credit

These are tools many of us use to manage our finances. Unfortunately, a rate hike means these approaches are more expensive. The vast majority of credit cards have a variable interest rate. That means when the Fed raises rates, your card issuer will raise your rate. If you’re carrying a credit card balance, you’ll start paying even more in interest each month—and that can add up quickly. 

The silver lining of a Fed rate hike

While debt becomes more expensive and can cause additional stress on top of price hikes due to inflation, there's a small silver lining.

The money you can earn on deposits and savings increases when the Fed interest rate goes higher. Many savings accounts start paying more, especially high-yield savings accounts. The interest on savings is never as high as the interest on credit cards, but higher earnings can offset the cost of your debt if you find the right account to park your money. High-yield savings accounts at online banks tend to offer the best rates. 

As you battle inflation, compare prices at different stores to reduce your costs, consider cutting back on unneeded spending, and look for ways to pay down debt faster. 

Author Information

MirandaMarquit_9483sm-e1587573873989.webp

Written by

Miranda Marquit is an award-winning freelance writer and podcaster who has covered various financial topics since 2006. Her work has appeared in numerous media outlets, and she is frequently asked to host workshops and appear on panels on topics related to financial wellness. She is the co-host of the Money Talks News podcast and a consumer finance advocate and spokesperson for moving hub HireAHelper.

James-Heflin.jpg

Reviewed by

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Related Articles

2.jpg

Everyday Finances

Meta description: A home equity loan could turn your home’s value into money you can spend to improve your life. Find out how.

Jackie Lam

Author

6.jpg

Everyday Finances

Compound interest is a two-sided coin. Good for your savings, bad for your debts. Find out more here.

4.jpg

Everyday Finances

If you’re a homeowner, you might be able to use a home equity loan to reach a major financial goal. Find out how.

Achieve Logomark

Achieve is the leader in digital personal finance, built to help everyday people move forward on the path to a better financial future.

Footer Trust Pilot Marker

TrustScore 4.8/5

Footer BBB Marker

.

*Actual MOLO app users, individual results will vary.

Personal loans are available through our affiliate Achieve Personal Loans (NMLS ID #227977), originated by Cross River Bank, a New Jersey State Chartered Commercial Bank. Loan applications are subject to credit review, underwriting criteria, and approval. Loans are not available in all states and available loan terms/fees may vary by state. Loan amounts range from $5,000 to $50,000. For loans $35,000+ must have a minimum 660 credit score. APRs range from 8.99% to 35.99% and include applicable origination fees that vary from 1.99% to 6.99%. Repayment periods range from 24 to 60 months. Example loan: four-year $20,000 loan with an origination fee of 6.99%, a rate of 15.49%, and corresponding APR of 19.54%, would have an estimated monthly payment of $561.60 and a total cost of $26,956.80. To qualify for a 8.99% APR loan, a borrower will need excellent credit, a loan amount less than $12,000.00, and a term of 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to pay off qualifying existing debt directly; or showing proof of sufficient retirement savings, could help you also qualify for lower rates. Funding time periods are estimates and can vary for each loan request. Same day decisions assume a completed application with all required supporting documentation submitted early enough on a day that our offices are open. Achieve Personal Loans hours are Monday-Friday 6am-8pm MST, and Saturday-Sunday 7am-4pm MST. $6,000 savings: Average savings claim for personal loans are based on 2023 data for 2, 3, and 4-year terms on funded debt consolidation loans for $21,600. Savings will vary based on several factors, subject to credit approval and other conditions. Any savings will be reflected in the offer.

Home Equity loans are available through our affiliate Achieve Loans (NMLS ID #1810501), Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Home loans are a line of credit. Loans are not available to residents of all states and available loan terms/fees may vary by state where offered. Line amounts are between 15,000 and $150,000 and are assigned based on debt to income and loan to value. Example: average HELOC is $57,150 with an APR of 12.75% and estimated monthly payment of $951 for a 15-year loan. Minimum 640 credit score applies to debt consolidation requests, minimum 670 applies to cash out requests. Other conditions apply. Fixed rate APRs range from 8.75% - 15.00% and are assigned based on credit worthiness, combined loan to value, lien position and automatic payment enrollment (autopay enrollment is not a condition of loan approval). 10 and 15 year terms available. Both terms have a 5 year draw period. Payments are fully amortized during each period and determined on the outstanding principal balance each month. Closing fees range from $750 to $6,685, depending on line amount and state law requirements and generally include origination (2.5% of line amount minus fees) and underwriting ($725) fees if allowed by law. Property must be owner-occupied and combined loan to value may not exceed 80%, including the new loan request. Property insurance is required as a condition of the loan and flood insurance may be required if the subject property is located in a flood zone. You must pledge your home as collateral and could lose your home if you fail to repay. Contact Achieve Loans for further details. Monthly savings claim is based on average monthly debt savings from originated loans for 2023. Monthly savings varies based on each loan situation and can be more or less than $800.

Affiliated Business Arrangement Disclosure: Achieve.com (NMLS #138464) and Achieve Loans are both wholly owned subsidiaries of Achieve Company. Because of this relationship, your referral to Achieve Loans may provide Achieve.com a financial or other benefit. Where permitted by applicable state law, Achieve Loans charges: 1) an origination fee of 2.50%, and 2) an underwriting fee of $725. You are NOT required to use Achieve Loans for a home equity line of credit. Please click here for the full Affiliated Business Arrangement disclosure form.

Resolution is available through our affiliate Achieve Resolution (NMLS ID # 1248929). All estimates for Achieve Resolution’s services are based on prior results, which will vary depending on your specific enrolled creditors and your individual program terms. Not all Achieve Resolution clients are able to complete their program for various reasons, including their ability to save sufficient funds. Achieve Resolution does not guarantee that your debts will be resolved for a specific amount or percentage or within a specific period of time. Achieve Resolution does not assume your debts, make monthly payments to creditors or provide tax, bankruptcy, accounting or legal advice or credit repair services. Achieve Resolution’s services are not available in all states, including New Jersey, and their fees may vary from state to state. Please contact a tax professional to discuss potential tax consequences of less than full balance debt resolution. Read and understand all program materials prior to enrollment. The use of Achieve Resolution services will likely adversely affect your creditworthiness, may result in you being subject to collections or being sued by creditors or collectors and may increase the outstanding balances of your enrolled accounts due to the accrual of fees and interest. However, negotiated settlements Achieve Resolution obtained on your behalf resolve the entire account, including all accrued fees and interest. C.P.D. Reg. No. T.S.12-03825.

© 2024 Achieve.com. All rights reserved. NMLS #138464