After dramatic rate cuts in 2020, the Federal Reserve has raised the federal funds rate and kept it relatively high in recent years to combat inflation. But the rate-raising period might be coming to a close.
If interest rates start on a downward trend, you can take action to make the most of this change for your financial situation. It’s never a bad time to start building your wealth.
Here’s what you can do now to take advantage of high rates and what you can prepare to do when the Fed lowers rates.
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Consolidate your debt
When a rate cut occurs, the interest rate tied to variable loan products tends to fall. A common example is credit card rates.
If rates fall, the interest rate tied to your credit card balance may also fall. With a lower rate, it may be easier to pay off your debt.
This is a prime opportunity for anyone struggling to escape credit card debt. Beyond simply paying down your credit cards, consider consolidating your debt with a personal loan to lock in a lower interest rate for the long term as you pay off the debt.
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Invest in CDs
Higher interest rates make it easier to put your savings to work. For example, many high-yield savings accounts offer relatively high rates to grow your funds.
If rates drop, the amount of interest you can earn through savings accounts and certificates of deposit (CDs) will likely fall too.
To combat the negative impact of potentially falling rates, consider investing in relatively high-rate CDs now. These CDs allow you to tuck your funds away with a predetermined interest rate for a set period of time.
Refinance your home
Mortgage rates might fall if the Federal Reserve decreases the fed funds rate. If you’ve been sitting on the sidelines of the home-buying market due to high mortgage rates, falling rates might be your signal to jump into the market.
If you recently bought a house with a relatively high interest rate attached to your mortgage, it might be time to refinance. Before applying, consider how much you would save each month and how long it would take to recoup the cost of refinancing.
If you don’t plan to live in the house for too long, then refinancing might not be a good financial move.
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Delay other large purchases
A house isn’t the only large purchase that most people finance. Vehicles are another commonly financed item.
If possible, put off making this large purchase, such as a car, until rates come down. Lower rates could make your car significantly more affordable.
Consider investing in the stock market
High interest rates often put some downward pressure on the stock market. But if the Federal Reserve cuts rates, this generally serves as a catalyst for growth.
After all, lower rates make borrowing money easier. With that, personal and corporate borrowing often allows for more profits and a growing stock market.
As an investor, news of interest rate cuts could signal it’s time to redirect some of your investment funds into the stock market.
As always, though, the best option for stock market investors is to invest consistently over a long period of time, regardless of the rise and fall of interest rates.
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Buy bonds
Bond prices typically have an inverse relationship with interest rates. Since most bonds pay a fixed interest rate, existing bonds are more attractive as interest rates fall. In contrast, rising interest rates typically make existing bonds less attractive.
With interest rates poised to fall, adding bonds to your portfolio could be a good opportunity.
When might the rate cut happen?
The Federal Reserve Open Market Committee (FOMC) makes interest rate decisions at meetings throughout the year. The Fed is planning to meet on July 30 and 31. It is also scheduled to meet in September, November, and December.
It’s possible that the Fed could cut interest rates at any or all of those meetings. With that, the soonest we might see rate cuts is the end of July, but most likely, it will happen in the fall.
How will a rate cut affect your personal economy?
You probably don’t think about how rate cuts impact your personal finances. But whether you are a saver, have loans with a variable rate, or plan to take out a loan for a big purchase, rate cuts could have a big impact on your finances.
Lower rates generally penalize savers because financial institutions pay less in interest. On the flip side, lower rates can make it easier for borrowers to afford the payments on their loans.
Bottom line
It’s impossible to predict the future of interest rates. But because inflation is going down, it seems likely that interest rate cuts are on the horizon.
If you don’t want to wait for interest rates to go down and want to tackle credit card debt, consider applying for a top 0% interest card and transferring your balance. Paying off high-interest debt is always a good idea.
As a consumer, now is the time to take stock of your current situation and adjust for the coming changes.
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