Interest rate: what it is and how it impacts our investments
The interest rate is one of the most important concepts in the world of investments and personal finance. It represents the return or cost of money over time and plays a significant role in investment returns and financial planning. In this text, we will explore what the interest rate is and how it impacts your investments.
What is the interest rate?
The interest rate is the cost of borrowing money or the reward for investing money. It is expressed as a percentage and can be applied in different financial situations:
- Nominal Interest Rate: It is the rate declared in loan, investment or financing contracts before considering inflation.
- Real Interest Rate: Takes inflation into account, that is, it is the nominal interest rate adjusted by the inflation rate. It reflects the purchasing power of money.
- Selic Interest Rate: It is the basic interest rate of the Brazilian economy, defined by the Central Bank. It directly influences interest rates on loans and investments in the country.
How does the interest rate impact your investments?
The interest rate affects your investments in several ways:
- Income from Fixed Investments: Fixed income investments, such as public bonds, CDBs and savings, are directly impacted by the interest rate. When interest rates rise, these investments tend to yield more. On the other hand, when the rate falls, yields also fall.
- Price of Securities: Fixed income securities have their prices affected by the interest rate. When interest rates rise, the market value of existing bonds falls, which can result in losses for investors who want to sell them before maturity.
- Asset Valuation: The interest rate affects the valuation of assets such as shares and real estate. Higher interest rates can make equity investments less attractive compared to fixed income, affecting stock prices.
- Loans and Financing: Lower interest rates mean cheaper loans and financing, which can be advantageous for consumers and companies. On the other hand, higher rates can make credit more expensive.
- Financial Planning: The interest rate is essential for long-term financial planning. It affects the future value of investments, such as retirement, and should be considered when setting financial goals.
How to deal with interest rate changes?
Dealing with interest rate fluctuations is critical to financial success. Some tips include:
- Diversify Investments: Having a diversified portfolio helps reduce the risk associated with changes in interest rates.
- Follow the Market: Be aware of changes in interest rates and adjust your investment strategy as necessary.
- Long-Term Planning: Consider the impact of interest rates on your long-term financial planning, such as retirement and children’s education.
- Consult a Professional: A financial planner or advisor can help you make informed investment decisions in a variable interest rate environment.
In short, interest rate plays a crucial role in investments and financial health. Understanding how it works and how it affects your investments is essential to making smart financial decisions and achieving your financial goals effectively.
