I have long wondered what gets people interested in personal finance.
Over time I have concluded that there are two scenarios:
- You go broke then decide to reverse course
- You do it right the first time
That’s pretty much it. If my assumptions and observations are correct, I’m guessing that the first entry into the land of personal finance is the most popular. (Am I right so far?)
Making the assumption that most people fall into personal finance after making mistakes with their personal finances—namely, getting into debt—then what role do interest rates play in how Americans take control of their money?
Interest Rates vs. Personal Finance
Unless you have lived until a rock for the past 20 years, you probably know interest rate have been in a long decline. Here’s a chart of the 1-year Treasury yield based on Federal Reserve data:
What role does this play in personal finance development?
I mean, if most people go broke before deciding to take control of their finances, wouldn’t it be logical that generations previous to mine would have gone broke earlier in life? It’s a lot easier to go broke with rates at 20% than rates at 2%, right?
And if the power of compounding works best when it can work its magic the longest, wouldn’t generations who had earlier “debt epiphanies” only stand to be better off than those who had them later? How many people would be in an entirely different situation if they had woken up about personal finance 5 years earlier than originally?
Of course we can make the claim that rates were highest when inflation was highest, but inflation rarely benefits the wage worker. The concept of sticky wages is true; wages have typically lagged inflation.
I could also make the claim that people who ignore their finances because high rates haven’t yet forced difficult decisions spend more time developing bad habits. As we all know, the longer you continue a habit, the more you reinforce it.
I’m just rambling, but I really do wonder if there’s a link between interest rates and personal finance literacy. It would seem to me that there is.
What do you think?
Is the psychology of the average person affected by interest rates?
Would higher rates force more people to go broke earlier, and thus reverse course in time to make changes that put them on the path to financial independence?