High interest rates might seem scary, but they can actually be a good thing for many of us, including investors, savers, retirees, and those aiming for financial independence. Sure, it was a bit of a shock when the Fed started increasing rates in 2022, but in the long run, this could be a blessing in disguise. As long as the economy doesn’t tank because of these rates, most of us stand to benefit.
Let’s look at the bright side, especially if you’re feeling a bit down about the current economic situation.
High interest rates can be a godsend for those with a good amount of cash and a strong cash flow. On the flip side, if you’re strapped for cash and your cash flow isn’t great, a high interest rate environment might not be ideal.
Here’s who stands to gain with the 10-year Treasury bond yield at a 17-year high, which is currently around 4.65%:
- Retirees on a fixed income: Higher interest rates mean higher bond yields, CD interest rates, and savings rates. This allows retirees to earn more risk-free and low-risk income to cover their increasing expenses.
- Those aiming for financial independence: Higher interest rates can help you reach your financial independence goals sooner. Your existing investments that generate income will likely increase to stay competitive.
- Homebuyers with lots of cash: Higher mortgage rates have led to a decrease in demand for real estate. This means cash-rich homebuyers have less competition and can take their time to find the perfect home.
- Existing homeowners and renters: Many homeowners refinanced during the pandemic or have mortgage rates far below current risk-free interest rates. Higher interest rates mean these homeowners are earning a higher risk-free return than the cost of their mortgage.
- Limited partners in funds with lots of cash: If you invest in well-capitalized private funds, you’re probably feeling pretty good about this high interest rate environment.
- Hard money lenders: If you’re a hard money lender, you can charge higher-than-normal rates.
- Companies with large balance sheets: Companies that took on too much debt before and during a high-interest rate environment are at risk. For those companies with large balance sheets, it’s shopping time.
- Those who can weather an economic crisis: If another deep recession hits due to high interest rates, those who have cash and can keep their jobs can go on a buying spree.
In conclusion, high interest rates can be a net positive for personal finance enthusiasts. It won’t last forever, but we should enjoy it while it lasts!
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