What happens to my money when interest rates rise? Household defense strategies for those continuing with savings accounts and index investing

“Interest rates have been rising lately, but will my household finances be okay?”
“Will the money I have in the bank increase? Or will I lose out due to rising prices?”

“I’m continuing with index investing, but what if stock prices drop significantly…”

Do you ever feel this kind of anxiety when building assets through savings accounts and index investing?

I also find interest rate movements to be a concerning topic when thinking about how to protect and grow my money. While rising interest rates can have a positive impact on savings, they can also have negative effects on things like mortgages, corporate activities, and the stock market.

That said, there is no need to panic and stop investing or move all your savings into different products. The important thing is not to accurately predict interest rate movements, but to create a system where your household finances will not be in trouble regardless of the situation.

In this article, we will consider how to protect your money in an era of rising interest rates for those who continue to use savings accounts and index investing.

What happens to household finances when interest rates rise?

When we organize the impact of rising interest rates, we see that while it is positive for savings, we must also pay attention to prices. If bank deposit interest rates rise, the interest you receive on your deposited money may increase.

For example, suppose you have 1 million yen in a savings account and the annual interest rate rises from 0.1% to 0.5%. Your annual pre-tax interest would go from 1,000 yen to 5,000 yen. While interest increases, what you must not forget here is rising prices.

If prices rise by 2% per year, the money needed to maintain the same lifestyle as the previous year will increase, even if your savings balance remains at 1 million yen. Even if your savings balance has not decreased, the amount of goods you can buy with that money may decrease.

It is important not to look only at interest rates, but to check prices as well.

The impact on index investing is not one-way

When interest rates rise, corporate borrowing costs increase, and market valuations of future profits may change, which can lead to a decline in stock prices.

On the other hand, since economic conditions, corporate performance, and investor expectations also affect stock prices, rising interest rates do not necessarily mean stock prices will fall. Especially in the case of index funds that include foreign stocks, foreign interest rates and exchange rates are also involved.

Instead of simply deciding to “stop investing because interest rates are rising,” you need to think about what you are investing in and when you plan to use the money.

What I consider important is separating “where you keep your money”

Are you only thinking about changing your investment destinations as a countermeasure to rising interest rates?

The conclusion is to divide the money you currently have by purpose. If you think about your money in three categories,

Money to be used in the near future

Money necessary for monthly living expenses such as rent, food, utilities, and insurance premiums.
This also includes planned moving costs, car purchases, and educational expenses expected within the next few years.

For money needed soon, it is important to avoid the risk of being unable to use it due to stock price fluctuations.

Money for emergencies

Money to handle unexpected events such as illness, unemployment, or sudden repair costs. The necessary amount varies depending on family structure and work style, but one way to adjust is to use several months’ worth of living expenses as a guideline.

Money not planned for use over a long period

Money that can be allocated to long-term asset formation after securing immediate living expenses and emergency funds.

There is an option to utilize index investing while understanding the risks. The important thing is not to manage all your money using the same criteria.

Money to be used in the near future and money planned for use more than 10 years from now require different management methods.

A ‘household stress test’ to stay calm even if interest rates rise

It is difficult to accurately predict what will happen to interest rates in the future.

Therefore, instead of predicting the future, try assuming situations that would put a burden on your household finances.

For example, please consider the following three points.

• What if your monthly expenses increase by 10,000 yen due to rising food and utility costs?

• What if the valuation of your index investments temporarily drops by 30%?

• What if your income decreases and you need to dip into your savings for six months?

This is not a prediction of the future, but an assumption to check the durability of your household finances.

For example, if your monthly living expenses are 250,000 yen, six months’ worth is 1.5 million yen. Even if you already have 1.5 million yen or more in savings, if you have large expenditures planned for the near future, you need to consider that amount separately.

Conversely, if your income is stable and you have family support or other sources of funds, the necessary emergency fund may differ. What we want to consider here is not just ‘how much can I increase through investment’.

Can you continue your daily life without selling your investment trusts even if stock prices fall?

Even if it is difficult to control investment performance yourself, you can review your living expenses and cash reserves.

How should you balance savings accounts and index investing in an era of rising interest rates?

Choose a savings account not just for the interest rate, but for its ease of use. If deposit interest rates rise, you might become interested in banks with higher rates.

However, before changing accounts solely for the interest rate, check the following points.

• ATM and transfer fees

• Convenience for salary deposits and automatic utility bill payments

• Conditions for applying deposit interest rates

• Whether the deposit is covered by the deposit insurance system

I use three banks: Japan Post Bank, which has many branches; Rakuten Bank, which is necessary for my investment accumulation; and Aozora Bank, which offers high interest rates. I use each one according to its purpose.

For example, with a deposit of 1 million yen, an interest rate difference of 0.1% per year results in a pre-tax interest difference of 1,000 yen per year. If the fees and effort increase to gain that difference, it is worth considering whether it is truly beneficial for you.

In principle, general deposits, etc., are protected by the deposit insurance system up to 10 million yen in principal per depositor per financial institution, plus interest. Be sure to check the types of deposits and conditions that are covered.

For index investing, confirm your investment goals rather than focusing on interest rates

If you are investing for the long term, frequently changing your accumulation investment policy based solely on interest rate news will only make it easier to become confused in your decision-making. Since I am also investing for the long term using index funds, I want to confirm the following three points.

• Which regions and assets are the products you are invested in diversified across?

• How many years from now do you plan to use the money, and for what purpose?

• Can you comfortably continue holding your investments even if a significant price drop occurs?

If a decline in value would mean you don’t have enough for living expenses, it might be a priority to review your cash reserves or investment amounts before changing where you invest.

On the other hand, if you have secured an emergency fund (3 months to 1 year of living expenses) and there are no changes to your investment goals or risk tolerance, there is no need to change your long-term investment strategy just because of changes in interest rates.

While there is no guarantee that stock prices will definitely recover in the future, it is important to make decisions based on your own financial plan.

6 household budget reviews you can start today

There is no need to start making difficult economic forecasts. Please check the items below.

1. You know your monthly living expenses

2. You are not investing money that you plan to use in the near future

3. You know how many months you can live if your income decreases

4. You have checked the interest rates and fees of your savings accounts

5. You have considered the impact that a decline in the value of investment trusts would have on your household budget

6. You have your own rules to avoid panic buying or selling when you see news about interest rates or stock prices

It is not a problem if these do not apply to you. Just writing down your living expenses and savings balance will make it easier to understand your financial situation.

Rather than trying to create a perfect household budget all at once, let’s organize things little by little, starting with what you can do.

I am building my assets through a simple strategy of savings accounts plus index investing. I try to keep expenses down by cooking at home more, and I work a part-time job to secure a labor income of about 136,000 yen after tax so that I can focus on my work.

Since I am continuing with long-term index investing, I personally feel that this is the way to build larger assets.

Build a household budget that can adapt to changes rather than predicting interest rates

While rising interest rates have a positive side for savings, they also affect various areas such as prices, borrowing rates, and the stock market.

That is why simple decisions like increasing savings because interest rates are rising or stopping investments because stock prices might fall are not enough. What is important is to secure the money you plan to use, prepare for emergencies, and think about long-term asset formation.

Both savings accounts and index investing have their own roles. Neither one is absolutely correct. Growing your money and living with peace of mind—value both.

That is a realistic household defense in an era of changing interest rates. Have you reviewed anything in preparation for rising interest rates?

I hope this article serves as a starting point for you to think about money. Thank you for reading until the end.

I explain examples of my living expenses and household budget in the article below ⬇️
https://note.com/proper_lynx4634/n/nef72572814cf