American interest rates: how do they work, and when should you worry about them?

If there’s something that makes us really worry as we grow into economic freedom is the American interest rates. The concept may seem a bit cloudy while we don’t have anything to do with it, but as the economy shifts, we must take our time to understand what it all means.

It’s not hard to grasp. It only gets a bit tricky when you’re found in a situation where you have to deal with interest and don’t really know how or why. If you feel like you can end up in that position, take a rest, grab your expenses and read the article below!

What is interest?

If you’re not familiar with the concept of interest, that’s a good place to start to learn. Imagine that you’re trying to start a business and, in order to be able to afford it, you ask your bank for a loan. They accept it, and as with all loans, you have to pay all the money back. So far, so good.

Then, comes the catch: along with the original money you borrowed, the bank is going to charge you a 5% interest rate for every month you don’t pay your debt. That means that, if you ask for $10,000 as a loan, you’ll owe the bank $10,500 the next month. The next one, it’ll be $11,000, then, $11,500, and so on.

We call that simple interest when the value only adds up based on the original value owed. If we made that same calculation with compound interest, the percentage would accompany the increasing value. That means that, if you owe $10,500 to the bank in the first month, next month, you’ll owe $11,025.

That happens because, as soon as the first interest rate is added to the original value, it acts based on that result. This is why it’s so important to not only be aware of the meaning of interest, but also the conditions under which they are presented to you.

How interest affects you

Now that you know what interest rates are, it’s clear how they can become a big problem when you don’t know how to manage them properly. This happens due to the way interest can influence anything, from your loans to your savings and even your grocery shopping. But, how so?

Recently, the Federal Reserve announced that the American interest rates would rise from 0.25% up to 0.50%, one of the many rises that are supposed to come. Because of the COVID-19 pandemic, the US saw its inflation rise a lot and very fast. 

To counter-attack that, one of the government’s strategies is raising the interest rate in the USA, slowing down the economy, and bringing things back to a balance. It makes people want to save money on their savings accounts, where their funding is safe and have a chance to grow (with a higher interest rate).

That is primarily done through the Fed interest rate, the way the Federal Reserve has to control how much are the American interest rates going to cost. From the value established by The Fed, banks can apply their own rates on their assets, such as loans, savings accounts, checking accounts, etc.

Should you worry?

If your question is if you should worry about the American interest rates, well, sort of. They are something that can affect your daily life, but there’s not much you can do against them. What you can do, however, is work with them.

First things first: know your expenses. Check everything: where is the money you use in your daily life? Where do you keep your savings? Do you think you’re going to need any loans in the future? Organize all you know and anything you’re able to predict.

Then, check the government numbers and their projections for the next months (or years, depending on what your plans are). Remember that things can always change, so don’t rely too much on what’s to come and is not under your control. 

The next step is to understand the interest rates of your own bank(s). All the conditions of the services you use should be thoroughly understood, because you’ll be able to compare them to what other banks and financial institutions can offer.

Finally, after all this, it’s time to keep and/or invest your money where it’s going to accommodate you and your needs the most. Be careful, because the interest rates aren’t the only way a bank can charge you. Read all the terms and conditions. Don’t forget to use tools to help you with your finances too.

OneBlinc is here to help you!

Here, at OneBlinc, we keep the lowest interest rates so that you can use your loans without having to worry about huge debts in the future. Our goal is to help you overcome the hard times and grow along with your savings! Get to know us and enjoy our services!