Interest rates are on the move as the Federal Reserve continues to adjust its monetary policy. After keeping rates elevated throughout 2023, the Fed has already implemented three cuts in 2024—a 0.50% reduction followed by two 0.25% decreases—and is signaling the possibility of two additional cuts in 2025. These changes not only influence the returns on cash holdings, like savings accounts and certificates of deposit (CDs), but also ripple across other areas of your personal finances.
Being proactive during these shifts is essential for making smarter financial choices. From reassessing where to keep your cash to exploring opportunities for better returns or adjusting your financial strategy, understanding how falling interest rates affect your money can position you to navigate this evolving landscape with confidence.
Here’s what you need to know about how lower rates impact your finances—and how to make the most of them.
What Is the Federal Funds Rate and Why Does It Matter?
The Federal Funds Rate is the interest rate banks charge each other for overnight loans to meet reserve requirements. Set by the Federal Reserve, this rate serves as a benchmark for many other interest rates, including those on savings accounts, mortgages, credit cards, and loans.
When the Federal Funds Rate drops, borrowing becomes cheaper, potentially encouraging spending and investment. However, it also means lower returns on savings vehicles like certificates of deposit (CDs) and high-yield savings accounts.
5 Ways Falling Interest Rates Can Impact Your Money
When interest rates fall, the ripple effects can be felt across nearly every area of your financial life. While lower rates can make borrowing more affordable, they also affect your savings, investments, and overall financial strategy.
Here’s how falling rates might influence key aspects of your finances and what you can do to adapt.
#1: Savings and Cash Holdings
Lower interest rates usually lead to lower returns on savings vehicles like savings accounts, money market accounts, and certificates of deposit (CDs). In 2024, high-yield savings accounts reached their peak, offering yields above 5%.
However, according to Bankrate, those yields are projected to drop to around 3.8% in 2025. This decline means that growing your cash reserves may become more challenging, especially if you prefer low-risk options.
Key Strategies to Consider:
- Shop around for high-yield savings accounts or online banks, which often offer more competitive rates.
- Consider short-term CDs if you want slightly better returns but still need flexibility.
- Keep only what you need for emergencies in low-yield accounts, and explore alternative strategies for surplus cash.
#2: Borrowing Costs
One of the most immediate benefits of falling interest rates is typically cheaper borrowing. Mortgage rates, auto loans, student loans, and personal loans often decline alongside rate cuts, making it more affordable to finance major purchases.
However, the current environment shows that this isn’t always the case. Despite the Federal Reserve’s rate cuts, mortgage rates have remained stubbornly high, with 30-year fixed rates hovering around 7%. This disconnect occurs because mortgage rates—and longer-term interest rates in general—are influenced by factors beyond the Fed’s moves, such as inflation expectations, bond market performance, and global economic trends.
While there is potential for rates to decline over time—Freddie Mac recently reported the first dip in the average 30-year fixed mortgage rate in six weeks—it’s important to remember that falling interest rates don’t always translate into immediate affordability for homebuyers. Understanding these dynamics can help you plan your borrowing decisions more strategically.
Key Strategies to Consider:
- If you’ve been considering a major purchase, like buying a home or refinancing your mortgage, falling rates could make it more affordable.
- For existing debt, refinancing at a lower rate can help you save money on interest payments over time. However, be sure to weigh the immediate costs of refinancing against the long-term benefits.
- Be cautious about taking on more debt than you can comfortably manage, even if rates are favorable.
#3: Credit Card Debt
Many credit cards have variable interest rates directly tied to the Federal Funds Rate. When rates decrease, your credit card’s annual percentage rate (APR) may also drop, potentially reducing the cost of carrying a balance and giving you an opportunity to pay down debt more affordably.
That said, even as rates decline, the effect on high-interest credit card debt can be limited. A slight drop in your APR may not make a meaningful difference in how quickly you can pay down your balance, especially if the debt is substantial.
Additionally, credit card APRs often remain significantly higher than those associated with “good debt” options, like mortgages or personal loans. This disparity highlights the importance of prioritizing the repayment of high-interest credit card debt to minimize the long-term cost and free up cash flow for other financial goals.
Key Strategies to Consider:
- Prioritize paying off high-interest credit card debt to reduce the overall cost of carrying a balance.
- Consider consolidating your debt with a lower-interest personal loan or balance transfer card to accelerate your payoff strategy.
#4: Investments
Falling rates often result in lower yields on bonds and other fixed-income investments, which can significantly reduce passive income—particularly for those who rely on these investments for stability or retirement income. This decline may prompt investors to seek alternative income-generating strategies, such as dividend-paying stocks, real estate investment trusts (REITs), or other higher-yield options.
While these alternatives can enhance returns, they also typically involve greater risk and volatility, requiring careful consideration of your risk tolerance and financial goals.
At the same time, falling rates can open doors to new opportunities. Lower borrowing costs often fuel corporate expansion and investment, which can drive up stock market valuations. For equity investors, this creates potential for portfolio growth, especially in industries that benefit directly from reduced financing costs, such as technology, real estate, and consumer discretionary sectors.
Key Strategies to Consider:
- Partner with a financial advisor to review your portfolio and ensure it’s aligned with both your risk tolerance and long-term objectives. An experienced professional can help you strike the right balance between stability and growth, adjusting your strategy to take advantage of opportunities while mitigating potential downsides.
#5: Retirement Planning
Lower interest rates can have a complex and often mixed impact on retirement planning, influencing various aspects of your financial strategy. One major drawback tends to be the effect on pensions and fixed-income investments, which are cornerstones of many retirement plans.
Lower interest rates often result in reduced payouts for annuities and lower yields on bonds, money market accounts, and other conservative investments retirees typically rely on for predictable income. For those who depend on these assets, this can create a gap between the income they’ve planned for and what they’re able to generate, potentially forcing a reevaluation of their retirement strategy.
On the other hand, falling rates may lower the cost of borrowing, which can be helpful for retirees who need to take out a loan for major expenses or consolidate existing debt. For instance, lower interest rates on personal or home equity loans can provide more affordable ways to access funds for one-time expenses or to bridge cash flow gaps.
Key Strategies to Consider:
- Review your retirement plan to ensure it’s aligned with the current environment and your financial goals.
- Work with a financial advisor to develop a tailored plan that addresses the unique challenges of a low-rate environment while positioning your financial resources to support a secure and comfortable retirement.
TrueNorth Wealth Is Here to Help
Falling interest rates bring both opportunities and challenges, influencing various aspects of your financial life. By understanding their effects and making strategic adjustments, you can position yourself to take full advantage of this environment while protecting and making the most of your resources.
At TrueNorth Wealth, our team of fiduciary CFP® professionals is here to guide you through these changes with clarity and confidence. We’ll work closely with you to design a personalized, comprehensive financial plan that aligns with your goals and adapts to the ever-changing economic landscape.
TrueNorth Wealth is among the top Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a free strategy session, visit our website at TrueNorth Wealth or call (801) 316-1875.
