High interest rates could be the best thing for investors, personal finance enthusiasts, retirees, savers, and those seeking financial independence. You know, most of us.
Even though it was uncomfortable to lose money when the Fed first started hiking rates in 2022, the Fed may have ultimately done us a favor by hiking through the end of 2023. The economy didn't crash and burn due to overly restrictive interest rates, and most of us are net beneficiaries of higher interest rates.
The Fed finally started to decrease the Fed Funds Rate (FFR) in September and November of 2024 by 50 bps and 25 bps respectively. But, rates are still relatively high compared to the period from 2008 to 2022.
Let’s go through some positive thinking on high interest rates.
Why High Interest Rates Can Be The Best Thing Ever
Fundamentally speaking, for those with a lot of cash and strong cash flow, higher interest rates are a blessing. For those who are cash poor and have weak cash flow, a higher interest rate environment is suboptimal.
Let's discuss all the people who benefit when the 10-year Treasury bond yield is high. The 10-year bond yield is now around 4.4% in Q4 2024.
1) Higher interest rates are great for retirees on a fixed income
For retirees who lack side income, higher interest rates lead to higher bond yields, CD interest rates, and savings rates. As a result, retirees get to earn higher risk-free and low-risk income to pay for their rising expenses.
Of course, interest rates don't just rise in a vacuum. Higher interest rates are generally correlated with higher inflation rates. Therefore, even if a retiree earns a higher low-risk income, they might still earn a negative interest rate.
However, psychologically, retirees should feel better because they are earning a higher absolute dollar amount from their fixed-income investments. Eventually, inflation will roll over and there will be a moment in time when retirees are benefitting even more.
For example, if inflation is around 3.3% but Treasury bonds of every duration are yielding above 5.3%, retirees would be earning a real interest rate.
See the below example of fixed income rates in early 2024. See how you could earn 5.2% on a one-year U.S. Treasury bond and 4.99% for a two-year Treasury bond. Awesome!
2) Higher interest rates help folks reach financial independence sooner
Thanks to higher interest rates, to stay competitive, many of your existing investments that have an income component have tended to increase as well. As a result, higher interest rates are helping get you to FIRE sooner.
The sooner you get to your target passive income amount, the sooner you can retire and live a life of freedom. There is no better reward than being able to do what you want when you want!
Personally, my passive income got about a 10% boost because the average interest rate earned by my various income-producing investments went from about 3% to 4.85% in just one year. The rate will go higher as my bonds mature and get reinvested.
It's easier to generate more passive income in a high interest rate environment. As a result, it's easier to get to financial independence sooner.
Here is a snapshot of one month's dividend payment for the cash I invested in SPAXX, a Fidelity money market account with a yield of almost 5% at the time. I never thought we'd be able to earn 5% risk-free with Core CPI below 3.5%.
3) Higher interest rates benefit homebuyers with lots of cash
Thanks to higher mortgage rates, the demand for real estate has declined. As a result, homebuyers with lots of cash no longer have to compete against a lot of other homebuyers.
The bidding wars which lead to 10%, 20%, and sometimes 50% over asking prices were not healthy. They caused many buyers to overpay and many potential buyers to be disappointed.
Homebuyers with a hefty downpayment can now take their time and more easily buy what they want. In addition, sellers who list in a high mortgage rate environment are more likely to cut prices to drive demand. As a result, the cashed-up homebuyers can get better deals in a high-interest rate environment.
Thanks to higher interest rates, the home I wanted to buy in 2022 became available at a 14.4% lower price a year later. I even almost risked a friendship by wanting to borrow money from him.
The home never publicly came on the market again. But by keeping in touch and writing a real estate love letter, I was able to lock down the home with contingencies. Ultimately, I was able to buy the home for 14% off asking and 20% below what the sellers wanted, while the stock market rebound.
I'm thankful higher interest rates have kept the competition at bay. Because as a writer, it's hard to compete against all the techies, entrepreneurs, and finance people in the Bay Area!
In 2024, despite high mortgage rates, bidding wars came back because there is so much pent-up demand for housing. Our country simply has not built enough. And if the U.S. housing market gets as hot as the Canadian housing market, we could easily see prices increase by another 20% – 40%.
4) Higher interest rates enable more existing homeowners and renters to live cheaper
The vast majority of existing homeowners refinanced during the pandemic or have mortgage rates far below existing risk-free interest rates. Meanwhile, roughly 40% of homeowners have no mortgage.
A surge in interest rates means more homeowners are earning a higher risk-free return than the cost of their mortgage, e.g. 2.5% mortgage rate, 5.4% risk-free Treasury bond. As a result more existing homeowners are living for free or are lowering their housing costs.
The same thing goes for renters. Renters can now earn a higher risk-free income to offset their rent. So long as the increase in risk-free income is greater than their rent increase, renters are also winning.
5) Higher interest rates are great for limited partners in funds with lots of cash
If you invest in well-capitalized private funds then you're feeling optimistic about this high interest rate environment.
Your private real estate funds are buying commercial properties at a discount. Or they're lending money to quality developers and sponsors at extraordinary rates (12% – 13%). That's what Ben Miller, CEO of Fundrise said his firm is doing in my one-hour long interview with him.
Your venture capital funds that raised a ton of money can more easily win deals and invest in private companies at steeper discounts. As weaker venture capital funds begin to perform poorly, the best funds take market share.
Your venture debt funds are also stepping in to lend money to quality private companies at higher-than-normal rates as well. Venture debt funds benefit greatly from higher rates.
Once interest rates normalize (head lower), the value of the investments made by private funds tends to go higher. Meanwhile, some private funds will have locked-in long-term loans at higher rates.
6) Higher interest rates earn hard money lenders more money
If you're a hard money lender, then you also get to charge higher-than-normal rates. If you're savvy, you'll try to lend money at longer terms to lock in higher rates for longer near the end of the cycle.
I'm not a fan of hard money lending because I hate it when people default. Not only is there no recourse after a default, relationships can easily get ruined as well. Lending money to friends and family is a dangerous activity.
I'd much rather invest in a venture debt fund or a real estate income fund where I'm removed from the process. It's also better to have collateral to sell when lending money.
7) Higher interest rates provide an opportunity to take market share from debt-laden competitors
There will be a purging of companies that took on too much debt before and during a high-interest rate environment.
For example, a trucking company called Yellow filed for bankruptcy because it couldn't work out a deal with its lenders of $1.2 billion. A compromise also couldn't be made with its truckers union. As a result, competitors will swoop in and buy its trucks and stations for pennies on the dollar.
Every company in every industry that took on too much debt is at risk. For those companies with large balance sheets, it's shopping time.
8) Higher interest rates provide a chance to take care of multiple generations if there is an economic crisis
Finally, let's say another deep recession comes thanks to too-high interest rates. Prices of risk assets will decline, thousands of companies will shut down, and millions will lose their jobs.
Those who are cashed up and able to keep their jobs in an economic crisis can go on the greatest buying spree. Back during the global financial crisis in 2008, many cash-rich investors backed up the truck on stocks and real estate. By 2012, the economy recovered and started surging upward again.
Some of those who bought profited enough to create generational wealth so their children never have to work again. They were rewarded for being disciplined with their finances and taking risks during sketchy times.
Those who overextended themselves and had to sell during the downturn missed out. Those who declared bankruptcy had to wait seven years to be eligible for credit again. By then, asset prices were much higher.
Cynically speaking, the rich Fed Governors are OK with economic destruction because they and their rich friends are able to weather downturns the best. Once the masses are squeezed out of the system, they can then swoop in and purchase valuable assets at discounted prices for their heirs.
And once you get really rich, you and your children get even more privileges as evidenced by the much higher elite college acceptance rates for the top 0.1%.
High Interest Rates Are A Net Positive For Personal Finance Enthusiasts
For those of you who've been reading and listening to Financial Samurai for a while, you should appreciate this high-interest-rate environment. It won't last forever as I think we'll eventually revert to our 40+-year trend of downward-trending interest rates. But we should enjoy it while it lasts!
I'm taking advantage by building a bond portfolio. I had less than 5% of my net worth in bonds before rates shot up. But mostly, I'm taking advantage of higher interest rates by buying a dream home. I never thought I'd be able to afford such a home at this stage in my life.
So long as the economy doesn't replicate a 2008-style crash, high interest rates should be good for most of us. Save on and enjoy your money!
Reader Suggestions
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Real estate is a long-term net beneficiary of inflation. I especially like the Fundrise Income Fund which is lending out money at higher rates to quality developers and sponsors.
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- Artificial Intelligence & Machine Learning
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The interest rate is below market rate NYC rent increases so there is no benefit for many of us and the mortgage rates are too high to buy anything if you could find anything reasonable- closet size apts with a single stamp-sized window, a hole in the floor for a bathroom and a lighter for a stove are half a million. Not all your readers are wealthy and will never be wealthy.
I know you have written about what pensions are worth and how much you should have in your 401k/403b/457, but you have not (and no one else) writes about how much should you have in your 401k/403b/457 when you will be getting a pension when retired.
It would be very helpful if you wrote something for people who will be retiring with pensions (there are more of us than you think) and how much should we have in our 401k/403b/457 accounts or at least some discussion about it. (Some NYC employees can put money into more than one deferred account.) Many of us are thinking am I putting too much money into these accounts and sacrificing my enjoyment now or should I push forward for my future?
A lot of us can retire in our 50s and hope to have a long life and hope to not have to worry about money. We can’t buy homes in most parts of NYC because we don’t have family helping us or leaving us money when they die. Some of us built what they could all on their own and it would be helpful to have at least guideposts and discussions on what is realistic and smart.
Thank you for reading and I hope to see a post soon about this.
Check out: How to value my pension
I read that many times, but that value needs to be supplemented with the realities that even with a decent pension every year, you need savings because a nice pension today will not be so great in 5-10 years. This is especially true for expensive cities and retiring ‘young’ and not be eligible for Social Security for many, many, many years.
Sam,
Not sure if you’ve already discussed this- how do we take advantage of these high deposit rates for next 20-30years ? Is investing into 5% yield 30year T-Bonds a wise option,as rates will likely come down in the next 1-2years ?
Yes, that’s one way, buying long-dated Treasury bonds with your low-risk / risk-free portion of your net worth. You’ve got to decide your appropriate net worth asset allocation based on your goals and risk tolerance.
At current levels, I think bonds are more attractive than stocks. So I am asset allocating accordingly.
Dumb article.Interest rates are well below the actual inflation rate.Not to mention,taxes on interest.Anyone saving,by holding Dollars or future Dollars,like bonds,CD’s,etc.,is going to be a lot worse off than owning real assets,that will protect you against Dollar devaluation.Having some Dollars for short term spending needs is OK,but not for long term savings.
Thanks JR. I know I’m dumb, but I’m also trying to learn in order to be less dumb.
How are you investing your money? It would would be great to learn from you. Where do you think rates should be?
For context, can you please share your current age and financial situation? Thanks for your wisdom.
Sam, this article is brilliant again, whatever the point of view of the commenter is he/she is way off base. Interest rates on savings are definitely above inflation now presenting a great opportunity to get a solid cash flow going. I am split 50/50 between stocks and T-bills currently and both have done awesome this year and certainly beat inflation easily.
I am expecting interest rates to stabilize and maybe decline next year, but will adjust my asset allocation accordingly. I have 90% of my treasuries in 3 and 6 month T-bills and will be ready to move more into stocks if rates decline. Long term the stock market will continue to go up because American companies are the best in the world and no one ever makes money betting against US companies and US consumers. US consumers set the trends for the world and we will set the trends for the use of AI as well. Americans are innovative and creative and always have been.
We should listen to this guy since he’s clearly from the future where they exclude spaces in their sentences in certain situations to be more efficient.
I’m looking forward to reading more about your dream home.
I purchased more bonds this year than ever. They are all short-term bonds, though.
Should I buy more longer term bonds at this age? 50 years old and 5 years until full retirement.
Great content as always, Sam.
There seems to be a consensus that this higher interest rate environment is just “temporary” and that we’ll eventually see interest rates decrease. Where do we think the Goldilocks zone is? To me it seems there is only a few hundred basis points lower at best. What if higher interest rates are here to stay?
Doesn’t materially change the thesis you mention on investing, but it seems there’s this natural assumption everywhere.
Thanks for that chart. Didn’t know anyone was offering 10-year CDs over 5% this must be kind of a recent development because when I last looked it wasn’t available. I always look too early and then forget about it lol so thank you. I’ve been putting all my extra cash into four week t bills on automatic renewal in Treasury direct. Really appreciate all these tips. Also thank you I’m going to check out some bonds.
My wife and I have been saving and investing since 2001. Most of your readers have never seen high inflation and interests environment, nor they know how to survive it. As Mogran Hausel mentions in one of his podcasts “it’s blessing to be young and poor” (not exact words) as it gives you different perspective and attitude to money. When we were young, living in Eastern Europe, at some point inflation hit 330% per year. Only then you know and learn what it is and how to survive it. Nothing special today, interest rates should be above 8-9%. Too much money in the system yet.
How do you plan to survive higher rates?
If you’ve been saving since 2001, then I’m assuming you’re in your early 40s or late 30s? There are plenty of readers this age or older, including myself, who has been saving and investing since 1995.
Sam…I have to say as a VERY long time reader of your site, you continue to amaze me on the quality of your writing and topics. Between the BS of most of the financial web sites like Yahoo Finance, CNBC, etc, you provide such invaluable and refreshing content to all of us who want to better our financial lives. No drama here on FS, just the most direct and pertinent advice I have ever seen. Thank you.
Thank you Alex! I appreciate your words. I don’t have time or energy for drama. The little ones are enough to run my battery down to 0% every night!
At the end of the day, I’m trying to make sense of everything as best as possible to help others do the same.
So interest rates are 6% and real inflation is 16…
That s Minus 10 fs…
Central banks are laughing at us…
Is real inflation at 16%?
How are you investing / saving in this scenario?
Actually,according to Shadowstats website,current inflation is about 8% using methods from 1990 and 12%,using methods of calculation used during the Carter adminstration.So,16% may be correct,but I would use 12% as current inflation.
Shadow stats is garbage. He was outed as simply adding a fixed percentage onto the existing CPI. The only thing it shadows is the existing CPI plus a fixed rate. You can see it in his charts. I wouldn’t doubt the old method would report a higher number, but I doubt it would report a constant fixed increase like his charts show!
As an aggressive saver, I’m loving this environment! I plan to retire early at 40 thanks to my increased passive income.
Last year was tough for stocks, but now things have recovered and we still have higher interest rates.
What a win-win!
Plowing a bunch of money into reits. They’ve been beaten up lately and I think eventually rates will have to come down some. Investing for the long term and income!
I contend that interest rates never should have been as low as they were. Money should always cost something. Cheap, or nearly free money grossly distorted so many aspects of our economy, especially real estate. The effects of cheap money has touched nearly every industry.
I’ve done hard money lending in the past. There is recourse. It may be a drawn out process, but in California, there is recourse.
As a completely debt free household, I love high interest rates. And historically, these rates aren’t even high. More like what should be considered ‘normal’.
I like your take on this.
Nice to have SOFR or LIBOR based investments in your portfolio (ie floating rate investments) like BDCs to offset bonds and other “fixed income”
Not all fixed income is “fixed”, take advantage of it
It does not make sense and misleading . On point 1, if retiree hold fixed income fund, like tlt , he or she should have lost 40% and you are talking about a yield gain of 3%? Sam why you wrote something like this? Very disappointed on your articles recently. A long time reader
Hi Tim, sorry if you own TLT. That’s one of the most volatile long-dated bond ETFs around. Can you share why you own the fund?
It’s good to go through your investment thesis of owning a bond fund before, and during federal rate hikes. Most retirees I know own individual bonds and hold them to maturity. Going through the exercise will help you match your investment decisions with your response and financial objectives.
There’s a greater emphasis on cash flow for retirees. Please share your story, and if you would like to write an article on what you would like to read, I’m open to guest posts. It will help you work out your reservations and mistakes to make better decisions going forward.
Thanks
Are you sure you’re not sorry and disappointed for your own decisions and money losing investments?
To be disappointed by this article, and not see any of the positives is crazy. And common also demonstrates by many Americans are poorly educated, and not in great shape financially.
As a long time, Investor, I make mistakes all the time. But it’s important to analyze why you made those mistakes instead of blame someone else.
Can you really not look forward and see how higher rates today is beneficial for retirees on a fixed income? How many new dollar you invest today earns a higher interest-rate. And successful investing about being forward looking, not backward looking.
Yes, retirees got fleeced if they held risky investments like bond ETFs during the steepest rise of interest rates in history but this is not Sam’s fault but economic policies of the last 3 years pumping enormous amount of money to the economy and the Fed falling asleep at the wheel. Even though inflation rates are falling prices are going up albeit at a slower rate. Which means high rates are to stay for a while and no smart person should be buying a bond ETF like TLT with long duration when rates were near zero, which everyone who studied economics knew they were not sustainable during rapidly accelerating inflation. Instead retirees should be buying short term bonds from the Treasury, or even better create a bond ladder shortening maturities as interest rates rise and extending maturities when rates begin to drop. Sam only writes about benefits of high rates to those who can take advantage of the current situation. I am a retiree too and like very much when my cash makes 4.75-5.5% short term instead of 0.05%.
I think the key point some might miss is Sam is talking about buying individual bonds, not funds. You always get your money back as long as the counter party can pay, which in this case we are talking about US treasuries and maybe high quality muni or corp bonds. Different beasts.
Personally, I’m loving 12-24 month treasuries above 5%.
I’ll add that you might want to take a look at your own personal inflation to compare. Our mix has changed a bit since 2019, I was surprised to find our nominal spend wasn’t that far off from what it is today! Personal real interest rate, post tax, at 3.3%, risk free. Thank you FIRE gods!
Great post but high interest rates are not good for most. With over 1 trillion dollars in Credit card debt (most people pmts going up), most commercial loans on ARMs, t-bill returns crowding out SP 500 debt, banks getting squeezed by rates. Something is going to break it’s just a matter of time. They should have never printed so much money but on the other side they shouldn’t have cut it off so fast (fed needs to slow down).
Do you carry revolving credit card debt? If so, I’d pay that off ASAP. Most personal finance enthusiasts don’t have revolving credit card debt. It’s too expensive and onerous.
No credit card debt but over 8 figures of commercial debt.
What are the terms? I hear most commercial debt is variable?
I had a long discussion with Ben Miller at Fundrise about lending out credit at 12-13% net.
I think the math of higher interest does not work exactly as suggested when you consider the impact of taxes. If interest rates are at 1% and inflation is at 0%, you net 1% real interest gain… and pay taxes of say 0.30%. If interest rates are at 5% and inflation is at 4%, you also net 1% in real interest gain before taxes. The problem is that you will be paying taxes of 1.5%… bringing you into money losing territory. Only the government benefits.
Exactly. The article is misleading by not stating tax impact. For many people the marginal overall tax rate is higher than 40%, 5% interest rate ends up 3% gain. Still beats 2.5% mortgage though. Inflation is not relative since mortgage rate is inflation adjusted as well
Your worry and empathy for the top 1% is admirable. But I assure you the top 1% are fully aware of their tax rates and how to minimize taxes. Everybody had to pay taxes before rates went up.
Fyi: For tax year 2023, the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125 ($693,750 for married couples filing jointly).
I think that was not my point. I meant that any real interest rate income (nominal-inflation) is much more attractive at low interest/inflation levels than now, when taxes at any income level are considered.
Sounds good. I think most people calculate their before and after tax benefits. And most understand real versus nominal.
Would you rather have lower interest income? If so, why?
What are your thoughts on the current high interest rate environment? Always good to get a different perspective. Thanks
What are your thoughts on bond funds/bond ETFs vs. straight bond purchases?
I’m thinking it would be lower maintenance and more flexible than laddering, and it would still protect you after, say, a Fed pivot.
I was able to refinance during the lows, so my remaining mortgage is fortunately in a good place. And I don’t have any plans in the foreseeable future to take on new debt. So I’m quite happy with higher rates and being able to earn more passive income through my high-yield savings accounts and treasuries. I still have stock and bond exposure, but I like having a portion of my investments again in low/no-risk high-yield products which were paying practically zero for so long.
Spenders who don’t save and invest for their future are getting beat up. Spenders are just going to fall farther and farther behind.
100,000+ people went to Outside Lands music festival in San Francisco last week. Cheapest ticket for 3 days was $1,000, and it goes up to $3,000+.
Spend all you want! Just don’t ask for handouts in the future.
What’s the math around your new home purchase?
How do you see the home value adjusting if rates adjust up or down 1-2 points over the next 12 months?
Seems like it could be a SFH bonanza if rates drop by 2 points by q2 2024 in an election year.
Maybe we’d see 10-12% appreciation in that scenario.
People talk about lack of inventory. But if we can identify the house we want to buy in this environment, it is an opportunity to get a deal. Real estate is local, so hard to say the math.
But if mortgage rates do decline by 1-2%, I expect a 5% or greater uptick in the nation’s median home price. Every month that goes by is growing pent-up demand for homes. The life goes on cycle waits for no-one.
I want to get ahead of the herd and buy before a potential frenzy returns. I feel 75% confident that interest rates will decline back to long-term 40+-year trend (down) within 12-24 months. And I don’t want to be hunting for my dream home then.
Of course, there’s a 25% chance I think I could be wrong. Hence why I’m trying to get the best deal possible.
I greatly admire your intellect and the work you put into these articles but your lower for longer thesis has been blown sky high. You were wrong about rates and are wrong again with this prognostication. Powell ain’t no lame economist and he wants to break speculation in the RE market that has driven housing inflation. Plus the economy has shown it can withstand higher rates. Houses will become much more expensive to buy and people will still bend over backwards to afford them but the buyer pool will shrink dramatically. I don’t see rate cuts for at least 2 years unless unemployment spikes.
Isn’t no rate cut a good thing and in line with the theme of this post? I’m trying to look on the bright side of higher rates and the fact that the stock market has recovered and the real estate market is still staying steady nationwide is pretty remarkable given we can also earn higher risk free income now.
I definitely did not think Rates would get the current levels. So I’m pleasantly surprised by the rebound in my net worth.
How did you position your investments for the past 12 months and where do you think we’re going from here? At the end of the day, there’s no hiding from our investments.
I’m enjoying with:
1. 2.6% mortgage rate
2. Investment in Treasury Bonds
3. Investment in REITs
But I’m a growth investor so my portfolio is largely growth and total market fund.
I feel bad for my brother though; he’s looking for home in McLean VA and prices are insane plus you got people making multiple offers above asking without contingency and home inspections!
Poor me with my ARM loan.
But I do have a fair amount of cash in Worthy Bonds (paying 5.5%, and now 6 months for 6%) and Ibond still in. And only $175k left on the house. But if recession hits, then I may have opportunity to buy something cheap as you say.
$175K left on your mortgage is very digestible. The ARM reset is only once a year, so the absolute dollar amount increase in payment can’t be that much. And if you want, you can pay down extra principal.
Glad to hear from you that $175k is considered digestible. Right now, I’m paying $500 extra per month. And when I get my bonus in March, I’ll pay more, may even sell more of my employer stock that vested last year (so it is a long term gain). I was just reading your latest article though on the negatives of paying all cash for a house…..