The Effects of Wage & Interest Rates on Households

Interest rates impact your everyday life.
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You know how your own wages affect your household. What you earn means the difference between steak and hamburger, going to a fast food joint or a sit-down restaurant, or buying a CD versus going to a live concert. Interest rates have an impact on your budget as well. Both wages and interest rates affect the economy, and this trickles down to you as well.


Wages are determined by the demand for the job and the skill level required. A ballerina is highly skilled, but there are few available jobs, or demand, so the wages are on the low side. An attorney, or physician, is highly skilled as well, but the demands for those skills are quite high, so the salaries are high. Working at a fast food joint doesn't require much in the way of skills, except perhaps a smile. There are quite a few jobs in this class as well as qualified applicants, so the wages are low. Usually the higher the demand for a job, the higher the wages.

Interest Rates

Interest rates to consumers are determined by the interest the banks have to pay to borrow money. The Federal Reserve maintains the financial stability of the country. When the economy is growing too fast, the Federal Reserve increases the interest rate. High interest rates encourage saving rather than spending. When the economy is slowing down, the interest rate falls.

Interest Rates and Employment

If the interest rate is high, people have a tendency to stop spending money on goods and services, especially if the product is expensive -- such as a car -- and the only way to purchase it is through a loan. When the number of car purchases decreases, for example, it impacts the car manufacturers, who then cut back on employees. Higher interest rates put a damper on business expansion plans, and this slows down employment.


On a more personal basis, interest rates and wages affect you and your family when it comes time to buy a home. How much you earn at your jobs affects the size of the mortgage you qualify for. Most lenders demand that your total debt payments -- minimum payments on your credit cards, car payments and mortgage -- be no more than 28 to 36 percent of your income. The higher your income, the higher the monthly mortgage payment can be. The interest rate on your mortgage has a huge impact on your house payment. While your income determines how much mortgage you qualify for, your credit score affects the interest rate you can secure.

Credit Cards

Credit cards are a convenience and have some advantages over paying with cash or a debit card. If the merchandise you've bought doesn't live up to the promises of the retailer, you can dispute the charge if you bought the product with your credit card. It's more difficult to get cash back if the retailer doesn't agree to the refund. The downside to credit cards is the interest rate. It ranges from 8 percent to nearly 30 percent. Most credit card agreements specify that after the first year, the rate can change for a number of reasons including the bank deciding it just wants to charge a higher interest rate. The interest rate is determined by the laws of the state where the credit card issuer is located, not where you live. Delaware and South Dakota are two states with creditor-friendly laws.


Every household should have savings for emergencies. Most experts recommend you have from three to six months of living expenses socked away. Instead of keeping the money in a checking account that doesn't generate interest, keep the funds in a savings account. Interest rates that are low and favorable to a borrower are unfavorable to a saver, but that doesn't mean you shouldn't save.

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