3 ways interest rate cuts affect your money

Investing in your values

Here’s how to go with the flow if interest rates decrease, so your finances stay on track.

They say nothing is certain but death and taxes—and perhaps the fact that interest rates will rise and fall.

And although nobody can predict exactly when interest rates will decrease, how far down they’ll go, or what will happen with the economy, changing interest rates can affect your personal finances.

Keep in mind that when interest rate cuts happen, they’ll likely happen slowly and steadily over time. But here are three ways interest rate cuts can impact your money, along with potential moves to consider if lower rates are on the horizon.

The highlights:

  • Lower interest rates can make borrowing money more affordable. Refinancing an existing loan may also become more attractive.
  • Yields on savings accounts may decrease, making it less profitable to hold cash in savings.
  • The stock market could potentially perform well as rates decrease because it becomes cheaper for businesses to borrow money, too. But your investing strategy shouldn’t change.

 1. Borrowing becomes cheaper.

The big benefit of an interest rate cut is that taking out a loan becomes more affordable. So, when rates are lower, it may be a prime time to buy a car or a house or to refinance debt.

To illustrate the power of lower rates, a $300,000, 30-year mortgage with a 7% interest rate would yield a $1,996 monthly payment (principle and interest only; this doesn’t include private mortgage insurance, escrow fees, and taxes). But assuming you have the same variables with a 4% rate, the monthly payment goes down to $1,432. 

Try it: Check out our mortgage payment calculator to run your own numbers.

“For people who have been waiting to move, it’s going to be a better time for them to get lower mortgage rates,” says Brian Ford, head of financial wellness at Truist. “It’s also good for the economy because there’s typically some pent-up demand. So a lot of folks that have been waiting to buy a house or car because of high rates—they‘ll start to make moves.”

With rates on the decline, it can also be a great time to consolidate or refinance your debt. When you refinance, let’s say a mortgage, you get a new loan to pay off your existing loan. Even with closing costs, refinancing can be a good idea if you can reduce your interest rate by at least 2%—and some experts say a 1% reduction may even be worth it.Disclosure 1 But it also depends on your unique financial situation and goals.

•	1981: 19%, a peak during the “Great Inflation” •	1992 – 1993: Dropped to 3%, during a decade of interest moderation •	2002 – 2003: 1%, tech stocks decline plus post-9/11 recession •	2009 – 2015: 0.1%, rates cut after the 2008 recession •	2023: 5.5%, rates peak at their highest since 2000 •	2024: 8.5%, prime interest rate as of May 2024

2. You may earn less on your cash savings.

On the flip side, one of the disadvantages of low interest rates is that yields on savings accounts and CDs will decrease. For example, if you have $10,000 in a high-yield savings account with an annual percentage yield (APY) of 5%. You could earn $500 in interest over the course of a year without doing anything. But as the Federal Reserve System (aka the Fed) lowers interest rates, that 5% APY will likely decrease as well. If it went down to 2%, for example, you’d only earn $200 in interest in a year.

High rates have made it much more appealing to store cash in savings over the past few years. But just because rates are coming down doesn’t mean you should slack on saving.

“If you’ve been putting a lot of money in savings accounts, you could think about redirecting some of it into the stock market,” Ford says. “Rates drop over a period of time. So your strategy could be gradual: Pull back a little bit on saving cash and start investing into the market through your 401(k) or other means.”

Ford points out that even if you choose to redirect some of your cash toward investing, you still want to maintain a healthy emergency fund.

“As boring as it may sound, I don’t think anyone should make any big money moves in anticipation of rate cuts.” – Brian Ford, head of financial wellness, Truist

3. Stocks could go up—but your investing strategy shouldn’t change.

Generally, when interest rates go down, the stock market goes up. But a lot of different factors can impact public markets, so this isn’t always the case.

If you have extra cash on hand (in checking or savings accounts), you may want to move some of it into the stock market via a retirement or brokerage account, as Ford recommends. But the important thing is to stay the course with your investing strategy no matter what happens.

“Lower rates can actually boost the stock market in two ways,” says Ford. “One is that people already anticipate lower rates helping companies, and so stocks go up even before rates go down.” As many experts say, the market is forward-looking.

This phenomenon occurred toward the end of 2023, when stocks jumped 25%, thanks in part to an apparent end to interest rate hikes (along with solid economic data).Disclosure 5

“Second, the actual performance of companies may improve as the demand for new homes, cars, and personal loans plays out: As companies truly sell more, profit goes up, so stocks can go up because of that as well,” says Ford.

But should you suddenly start investing more in stocks for these reasons? “Probably not,” says Ford. This is because the impact of rate cuts on the market is already well underway. “I’m a big fan of dollar-cost averaging, which is a strategy of investing set amounts of money in the market at regular intervals, regardless of price.”

The final word on falling interest rates and your money

Federal interest rate cuts happen slowly, over a span of six to 12 months—maybe even longer. This means there’s no need to make abrupt, important financial decisions based on one rate cut. Instead of trying to time interest rates, stick to a financial strategy that supports you going after your goals on your own timeframe.

“As boring as it sounds, I don’t think anyone should make any big money moves in anticipation of rate cuts,” says Ford. “Good money habits are good for a reason; don’t change what you’re doing just because rates are falling.”

Next step suggestions:

  • Put the wheels in motion for a future big purchase. Make sure your down payment money is liquid and take steps to boost your credit score.
  • Look into consolidation or refinancing options with your current lender.
  • Stay the course with your investing strategy. The impact of forthcoming interest rate cuts may already be baked into the stock market, so it’s best to be consistent with investing.

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