July 31, 2025 • 11 mins
What if I told you there’s a force influencing your financial life every single day, and you might not even notice it? From the cost of your mortgage to the return on your savings, from the depth of your credit card debt to the threat of a recession, interest rates shape it all.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome back to
(00:00):
The Wealth Effect.
What if I told you there was something
quietly shaping your
life every single day?
Something that determines how big your
mortgage is, how fast your savings grow,
how much your credit card costs you, and
even whether a recession
is around the corner.
It's not a
politician.
It's not a CEO.
(00:20):
It's not even
money itself.
It's interest
rates.
Most people don't
really understand them.
They nod along when they hear
the Fed raised rates by 0.25%.
Or inflation is cooling,
so rate cuts may be ahead.
But what are the
real implications?
The real implications
are often missed by most.
(00:42):
Interest rates are the
hidden gears of our economy.
And if you understand them, you
gain an incredible advantage.
Today, we're talking about what are
interest rates, where they come from,
how they affect everything around you,
and most importantly, how to use them to
your advantage.
Let's fill
your pocket.
An interest rate is the cost of borrowing
(01:04):
money, or the reward for lending it.
It's like renting
out your money.
You pay a fee for using someone
else's money for a period of time.
That fee is expressed
as a percentage.
But that simple definition
hides complexities.
There are many types of interest rates,
including rates on your savings account,
mortgage rates,
(01:25):
the rates on U.S.
Treasury bonds, and the
federal funds rates.
Despite their differences, all
interest rates are connected.
They reflect two
forces, risk and time.
And together, they express something even
more fundamental, the time value of money.
Let me explain.
If I lend you $1,000 today, and you
promise to pay me back in a year,
(01:47):
I'm giving up access to
that money for 12 months.
That's time I
can't get back.
Time that I could have used the money to
invest, cover an emergency, or seize an
opportunity.
Even if you're guaranteed to be paid
back the exact $1,000, no more, no less,
you've lost value.
(02:08):
Why?
Because $1,000 today is worth
more than $1,000 tomorrow.
And that's the essence
of time value of money.
It's not about what
something is worth in theory.
It's about what it could
become if you had it now.
So when you hear interest rate,
don't just think of it as a cost.
Think of it as a translation of the way we
(02:29):
measure how much time and risk are worth
in dollars
and cents.
It's how the financial
world quantifies waiting.
It's how we value patience
or punish urgency.
And once you grasp that, you start seeing
every financial decision differently.
You start asking, what is the
opportunity cost of money?
(02:50):
What return do I need to
make waiting worth it?
And when is it actually worth
borrowing, even at a cost?
But there's
also risk.
What if I don't
get paid back?
What if inflation eats away at the
value of the dollar in the meantime?
Interest rates
bake all that in.
The longer the term, or the riskier the
(03:11):
loan, the higher the
interest rate tends to be.
Now zooming out, when the Federal Reserve
adjusts its target rate, the Federal Funds
Rate, it's not just pushing
numbers around on a spreadsheet.
It changes the cost of borrowing
for every bank in the country.
That, in turn, changes how banks lend
to you for mortgages, auto loans,
(03:33):
business loans, and
everything else.
A 1% move in interest rates could mean
thousands of dollars
gained or lost over time.
Understanding that connection from the Fed
to your wallet is the beginning of real
financial literacy.
Interest rates have shaped the
destiny of nations all over the world.
In the 1970s,
(03:54):
the U.S.
economy was plunged into something
called stagflation, slow
growth and high inflation.
Prices were rising, wages were stagnant,
and people were losing confidence.
The Federal Reserve, under Chairman Paul
Volcker, had a drastic
plan to shock the system.
Between 1979 and 1981, the Fed raised the
(04:16):
Federal Funds Rate from
around 10% to over 20%.
Yeah, over 20%.
That move
was brutal.
Mortgage rates
soared to over 18%.
Small businesses collapsed, car sales
plummeted, unemployment
rose, but it worked.
(04:38):
It turned
inflation around.
It was a painful lesson for the people on
how powerful interest rates really are.
And fast forwarding to 2008, after the
collapse of the Lehman Brothers and the
onset of the Great Recession, not
the Great Depression,
the Fed did the opposite.
It slashed rates to near zero
(04:58):
to stimulate the economy.
And suddenly, money
was so cheap to borrow.
For over a decade, we lived in a world
of 0% interest, where borrowing was
encouraged and
saving was penalized.
That era created massive growth in tech,
real estate, and risk-taking behavior.
(05:19):
But it also laid the groundwork
for something else, inflation.
When COVID hit, the Fed again lowered
rates and pumped trillions
into the economy.
But eventually, supply chains broke,
demand exploded, and prices surged.
Inflation came
back roaring.
So the Fed did what
it always does.
(05:39):
It raised interest
rates fast.
For millennials and Gen Zs, it was the
first time they'd ever seen the true cost
of credit rising
dramatically.
We're now living through
another Volcker-like moment.
Only this time, with a lot
more debt in the system.
And there's a reason why Einstein
(06:00):
supposedly called compound interest the
eighth wonder
of the world.
Because compound interest
earns interest on interest.
It's a snowball
effect.
And over time, it turns small
actions into massive outcomes.
Let's say you invest $1,000
at a 10% annual interest rate.
After year one,
it's $1,100.
(06:20):
After year two,
it's $1,210.
After year 10,
it's $2,593.
And after 30 years,
it's $17,449.
You didn't add
more money.
You didn't
take big risks.
You just let
interest compound.
But let's flip
(06:41):
the script.
Credit card companies love when
you don't pay off your balances.
Why?
Because the same compounding works
in their favor and not yours.
A $5,000 balance at a 24% interest can
balloon to over $10,000 in just a few
years without you ever
spending another dime.
(07:02):
This is why understanding which
direction interest is working is crucial.
Are you paying it?
Or are you
earning it?
Because over time, that one choice could
determine whether you
retire comfortably or never
retired at all.
So let's talk
strategy.
How do you turn interest rate into
a tool and not just a trap for you?
(07:23):
The first step is killing
off high interest debt.
Making this a priority like paying off
credit cards, payday loans, and anything
above a 10% interest are these are the
main wealth killers that people can't get
rid of fast enough before the
interest rate consumes them.
Number two, time
your borrowing.
When rates are low,
(07:43):
borrowing can be smart.
Starting a business, investing in real
estate, locking in a long-term mortgage.
These are all the moves that make sense
when the cost of borrowing money is cheap.
But in a high rate environment, you
have to be a little more cautious.
Ask yourself, is
the debt productive?
Will it grow my
income or wealth?
(08:04):
Or will it just
consume it?
Number three, let
your cash earn.
During low rates, keeping money in
your savings accounts is pointless.
But in today's environment, high-yield
savings accounts pay 4-5% and treasury
bills even more.
So don't let your money
just sit around idling.
Number four, understanding
(08:24):
inflation-adjusted returns.
If you're earning 4% but inflation
is 6%, your real return is negative.
Always think in real terms
and not nominal terms.
And lastly, consider fixed
versus variable rates.
When borrowing, fixed rates
lock in today's costs.
Variable rates fluctuate and can
(08:46):
rise sharply in high rate periods.
In short, interest rates
are like the weather.
You can't control them, but
you can prepare for them.
Interest rates are often called the
most powerful tool in the
central bank's arsenal.
And for
good reason.
They affect housing markets, stock
valuations, the cost of doing business,
(09:06):
government debt repayments, currency
strength, unemployment,
and even social unrest.
Think about it.
If rates rise, people
can't afford homes.
If people can't afford
homes, construction slows.
If construction
slows, jobs are lost.
If jobs are lost,
spending slows down.
If spending slows,
businesses cut back.
(09:27):
And the cycle continues
further and further.
In this way, interest
rates aren't just a number.
They're a signal, a
temperature check.
And yet, most
people ignore them.
They look at the monthly payment
on a car and not the rate.
They swipe credit cards
without checking the APR.
They let student loans accumulate interest
(09:47):
for years without realizing how much
they'll owe
in the end.
That's like being a sailor
without checking the wind.
You might move, but probably
in the wrong direction.
When you understand interest rates, not
just how they work, but how they work
for you and against you, you
start to see things differently.
You don't just save.
(10:08):
You start
to optimize.
And you don't
just spend.
You start
strategizing.
This awareness is what separates those
who build wealth from those who chase it.
The average person sees interest as a
nuance, while the informed person sees it
as an essential.
Interest rates
aren't very flashy.
They don't make headlines like scandals,
(10:31):
tech stocks, or politics,
or political drama.
But they matter, more than
almost anything else in finance.
They quietly shape the
trajectory of your life.
And if you ignore them, you risk being
swept away by the forces
you never saw coming.
But if you pay attention, you gain a way
to navigate through ever-changing terrain
(10:51):
of money, debt,
opportunity, and risk.
So ask yourself, are interest
rates working for you?
Or are they working
against you?
Because in an era where money moves faster
than ever, you need to understand what
drives that money.
Thank you for
listening.
Until next time.
Welcome back to
(00:00):
The Wealth Effect.
What if I told you there was something
quietly shaping your
life every single day?
Something that determines how big your
mortgage is, how fast your savings grow,
how much your credit card costs you, and
even whether a recession
is around the corner.
It's not a
politician.
It's not a CEO.
(00:20):
It's not even
money itself.
It's interest
rates.
Most people don't
really understand them.
They nod along when they hear
the Fed raised rates by 0.25%.
Or inflation is cooling,
so rate cuts may be ahead.
But what are the
real implications?
The real implications
are often missed by most.
(00:42):
Interest rates are the
hidden gears of our economy.
And if you understand them, you
gain an incredible advantage.
Today, we're talking about what are
interest rates, where they come from,
how they affect everything around you,
and most importantly, how to use them to
your advantage.
Let's fill
your pocket.
An interest rate is the cost of borrowing
(01:04):
money, or the reward for lending it.
It's like renting
out your money.
You pay a fee for using someone
else's money for a period of time.
That fee is expressed
as a percentage.
But that simple definition
hides complexities.
There are many types of interest rates,
including rates on your savings account,
mortgage rates,
(01:25):
the rates on U.S.
Treasury bonds, and the
federal funds rates.
Despite their differences, all
interest rates are connected.
They reflect two
forces, risk and time.
And together, they express something even
more fundamental, the time value of money.
Let me explain.
If I lend you $1,000 today, and you
promise to pay me back in a year,
(01:47):
I'm giving up access to
that money for 12 months.
That's time I
can't get back.
Time that I could have used the money to
invest, cover an emergency, or seize an
opportunity.
Even if you're guaranteed to be paid
back the exact $1,000, no more, no less,
you've lost value.
(02:08):
Why?
Because $1,000 today is worth
more than $1,000 tomorrow.
And that's the essence
of time value of money.
It's not about what
something is worth in theory.
It's about what it could
become if you had it now.
So when you hear interest rate,
don't just think of it as a cost.
Think of it as a translation of the way we
(02:29):
measure how much time and risk are worth
in dollars
and cents.
It's how the financial
world quantifies waiting.
It's how we value patience
or punish urgency.
And once you grasp that, you start seeing
every financial decision differently.
You start asking, what is the
opportunity cost of money?
(02:50):
What return do I need to
make waiting worth it?
And when is it actually worth
borrowing, even at a cost?
But there's
also risk.
What if I don't
get paid back?
What if inflation eats away at the
value of the dollar in the meantime?
Interest rates
bake all that in.
The longer the term, or the riskier the
(03:11):
loan, the higher the
interest rate tends to be.
Now zooming out, when the Federal Reserve
adjusts its target rate, the Federal Funds
Rate, it's not just pushing
numbers around on a spreadsheet.
It changes the cost of borrowing
for every bank in the country.
That, in turn, changes how banks lend
to you for mortgages, auto loans,
(03:33):
business loans, and
everything else.
A 1% move in interest rates could mean
thousands of dollars
gained or lost over time.
Understanding that connection from the Fed
to your wallet is the beginning of real
financial literacy.
Interest rates have shaped the
destiny of nations all over the world.
In the 1970s,
(03:54):
the U.S.
economy was plunged into something
called stagflation, slow
growth and high inflation.
Prices were rising, wages were stagnant,
and people were losing confidence.
The Federal Reserve, under Chairman Paul
Volcker, had a drastic
plan to shock the system.
Between 1979 and 1981, the Fed raised the
(04:16):
Federal Funds Rate from
around 10% to over 20%.
Yeah, over 20%.
That move
was brutal.
Mortgage rates
soared to over 18%.
Small businesses collapsed, car sales
plummeted, unemployment
rose, but it worked.
(04:38):
It turned
inflation around.
It was a painful lesson for the people on
how powerful interest rates really are.
And fast forwarding to 2008, after the
collapse of the Lehman Brothers and the
onset of the Great Recession, not
the Great Depression,
the Fed did the opposite.
It slashed rates to near zero
(04:58):
to stimulate the economy.
And suddenly, money
was so cheap to borrow.
For over a decade, we lived in a world
of 0% interest, where borrowing was
encouraged and
saving was penalized.
That era created massive growth in tech,
real estate, and risk-taking behavior.
(05:19):
But it also laid the groundwork
for something else, inflation.
When COVID hit, the Fed again lowered
rates and pumped trillions
into the economy.
But eventually, supply chains broke,
demand exploded, and prices surged.
Inflation came
back roaring.
So the Fed did what
it always does.
(05:39):
It raised interest
rates fast.
For millennials and Gen Zs, it was the
first time they'd ever seen the true cost
of credit rising
dramatically.
We're now living through
another Volcker-like moment.
Only this time, with a lot
more debt in the system.
And there's a reason why Einstein
(06:00):
supposedly called compound interest the
eighth wonder
of the world.
Because compound interest
earns interest on interest.
It's a snowball
effect.
And over time, it turns small
actions into massive outcomes.
Let's say you invest $1,000
at a 10% annual interest rate.
After year one,
it's $1,100.
(06:20):
After year two,
it's $1,210.
After year 10,
it's $2,593.
And after 30 years,
it's $17,449.
You didn't add
more money.
You didn't
take big risks.
You just let
interest compound.
But let's flip
(06:41):
the script.
Credit card companies love when
you don't pay off your balances.
Why?
Because the same compounding works
in their favor and not yours.
A $5,000 balance at a 24% interest can
balloon to over $10,000 in just a few
years without you ever
spending another dime.
(07:02):
This is why understanding which
direction interest is working is crucial.
Are you paying it?
Or are you
earning it?
Because over time, that one choice could
determine whether you
retire comfortably or never
retired at all.
So let's talk
strategy.
How do you turn interest rate into
a tool and not just a trap for you?
(07:23):
The first step is killing
off high interest debt.
Making this a priority like paying off
credit cards, payday loans, and anything
above a 10% interest are these are the
main wealth killers that people can't get
rid of fast enough before the
interest rate consumes them.
Number two, time
your borrowing.
When rates are low,
(07:43):
borrowing can be smart.
Starting a business, investing in real
estate, locking in a long-term mortgage.
These are all the moves that make sense
when the cost of borrowing money is cheap.
But in a high rate environment, you
have to be a little more cautious.
Ask yourself, is
the debt productive?
Will it grow my
income or wealth?
(08:04):
Or will it just
consume it?
Number three, let
your cash earn.
During low rates, keeping money in
your savings accounts is pointless.
But in today's environment, high-yield
savings accounts pay 4-5% and treasury
bills even more.
So don't let your money
just sit around idling.
Number four, understanding
(08:24):
inflation-adjusted returns.
If you're earning 4% but inflation
is 6%, your real return is negative.
Always think in real terms
and not nominal terms.
And lastly, consider fixed
versus variable rates.
When borrowing, fixed rates
lock in today's costs.
Variable rates fluctuate and can
(08:46):
rise sharply in high rate periods.
In short, interest rates
are like the weather.
You can't control them, but
you can prepare for them.
Interest rates are often called the
most powerful tool in the
central bank's arsenal.
And for
good reason.
They affect housing markets, stock
valuations, the cost of doing business,
(09:06):
government debt repayments, currency
strength, unemployment,
and even social unrest.
Think about it.
If rates rise, people
can't afford homes.
If people can't afford
homes, construction slows.
If construction
slows, jobs are lost.
If jobs are lost,
spending slows down.
If spending slows,
businesses cut back.
(09:27):
And the cycle continues
further and further.
In this way, interest
rates aren't just a number.
They're a signal, a
temperature check.
And yet, most
people ignore them.
They look at the monthly payment
on a car and not the rate.
They swipe credit cards
without checking the APR.
They let student loans accumulate interest
(09:47):
for years without realizing how much
they'll owe
in the end.
That's like being a sailor
without checking the wind.
You might move, but probably
in the wrong direction.
When you understand interest rates, not
just how they work, but how they work
for you and against you, you
start to see things differently.
You don't just save.
(10:08):
You start
to optimize.
And you don't
just spend.
You start
strategizing.
This awareness is what separates those
who build wealth from those who chase it.
The average person sees interest as a
nuance, while the informed person sees it
as an essential.
Interest rates
aren't very flashy.
They don't make headlines like scandals,
(10:31):
tech stocks, or politics,
or political drama.
But they matter, more than
almost anything else in finance.
They quietly shape the
trajectory of your life.
And if you ignore them, you risk being
swept away by the forces
you never saw coming.
But if you pay attention, you gain a way
to navigate through ever-changing terrain
(10:51):
of money, debt,
opportunity, and risk.
So ask yourself, are interest
rates working for you?
Or are they working
against you?
Because in an era where money moves faster
than ever, you need to understand what
drives that money.
Thank you for
listening.
Until next time.
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