8 Smart Money Moves to Make When Interest Rates Are Dropping

When the Federal Reserve cut its target federal funds rate by 50 basis points in September, it signaled a shift in the financial landscape: After years of rising, rates are now in decline.

Lower interest rates can provide relief for borrowers but often pose challenges for savers. Perhaps you were using higher rates to build wealth while you sleep. But as rates drop, it's crucial to reassess your financial strategy.

Here are eight smart money options to consider so you can maximize growth opportunities when interest rates are falling.

As interest rates drop, you might want to grab higher rates on long-term certificates of deposit (CDs) before they fall further.

While CDs lock up your money for a period and don’t offer the flexibility of a savings account, they do give you stability and guaranteed returns over a set period. 

If you expect interest rates to continue falling, purchasing a long-term CD might be a good way to secure a higher return on a portion of your savings.

Keep in mind, though, that early withdrawals from CDs often incur penalties, so it’s important to be sure you can leave the money untouched for the full term.

Real estate investment trusts, or REITs, allow you to invest in real estate without the responsibility of owning physical property.

When interest rates drop, REITs can be an attractive option because lower borrowing costs often improve profit margins for real estate companies.

Many REITs also pay dividends, offering a potential income stream. In fact, REITs are required by law to pay out at least 90% of taxable income to shareholders in the form of dividends.

However, it’s essential to assess each REIT’s performance history and the sector it focuses on before making a purchase.

Both Series I savings bonds and Treasury inflation-protected securities (TIPS) are government-backed options designed to protect against inflation.

Series I bonds earn interest that’s adjusted for inflation every six months, making them a relatively safe bet in uncertain times. TIPS adjust their principal based on inflation rates, ensuring that your investment retains its purchasing power.

These options won’t make you rich, but they can be appealing if you want to safeguard money while maintaining inflation protection.

High-yield bonds are also known as "junk bonds." They are another option that can offer higher returns when interest rates decline.

These bonds typically come with greater risk because they are issued by companies with lower credit ratings. However, they also tend to offer higher yields to compensate for that risk.

If you are considering high-yield bonds, it’s crucial to weigh the potential for higher returns against the increased possibility of default, particularly during volatile market conditions.

Real estate can be an attractive option in a low-rate environment, especially if you are thinking about purchasing investment property. Lower interest rates can mean cheaper financing, which can improve your return on investment when buying property.

However, purchasing real estate involves significant upfront costs and requires you to carefully consider location, rental demand, and property management costs.

Falling interest rates can also make buying a primary residence more affordable if mortgage rates dip. Lower home loan rates can reduce monthly payments and overall interest costs over the life of the loan.

If you have been considering buying a home, a drop in mortgage rates could allow you to secure more favorable home loan terms. 

However, it’s still essential to ensure that you are financially prepared for homeownership, including upfront costs, maintenance, and property taxes.

A bond ladder involves a strategy of staggering the purchase of bonds so that they mature at regular intervals.

As each bond matures, you can reinvest the proceeds into a new bond at the current rate. This strategy allows for flexibility and income consistency, even when interest rates are unpredictable.

While stocks are inherently more volatile than bonds or savings accounts, they can provide opportunities for growth when interest rates drop. Lower rates can stimulate economic activity, which often benefits the stock market.

Additionally, companies can borrow at lower costs, which can boost profitability. For long-term investors, staying invested in stocks can offer the potential for higher returns compared to fixed-income investments, especially in a low-interest-rate environment.

It’s important, however, to stay diversified and maintain a portfolio that aligns with your risk tolerance. And never forget that investing in stocks can subject you to financial losses, some of which may be permanent.

When interest rates are falling, there are steps you can take to better manage your finances.

From locking in higher returns with long-term CDs to exploring bond ladders, each of these potential wealth secrets comes with its pros and cons.

Ultimately, the best approach depends on your personal financial goals and risk tolerance. So, choose the strategy that makes most sense in your wealth journey.