Low interest rates? 3 financial moves to make

With multi-decade highs for inflation behind us for now, the Federal Reserve has paused its aggressive interest rate hike campaign. As interest rates inevitably start to come down, you will be presented with opportunities to borrow at more favorable rates.

The better you understand this change in the economic environment, the better position you can be in to take action. In this article, we'll give financial strategies and key money moves to consider as interest rates fall.

Borrowing costs can be a significant piece of your total budget. Simply, when interest rates on loans are high, these costs grow. High interest rate environments can have a negative impact not only your wallet, but on the overall economy:

• Loans and mortgages are more expensive, discouraging borrowing for homes, cars or businesses.
• With less borrowing—and more people earmarking money to cover interest on their existing loans—everyone is less willing to spend, potentially slowing the economy.
• Fewer businesses getting loans might mean hiring freezes or slower growth.

But when rates fall, the opposite occurs. The cost of loans decreases, and making a big purchase becomes more attractive—and often more achievable:

• More people can afford to borrow money to achieve their big financial goals, like owning a house.
• More borrowing often leads to more spending, potentially giving the economy a boost.
• Businesses with easier access to loans might hire more or expand, leading to a potential economic boom.

When interest rates fall, it becomes cheaper to borrow money. This can mean several benefits for borrowers, making it an attractive time to consider taking out a loan or refinancing your existing debt. For instance, lower interest rates directly translate to lower monthly payments on loans. A drop in interest rates could mean hundreds of dollars saved each month. That money can be put toward other financial goals, like boosting your savings or simply having more breathing room in your budget.

With lower borrowing costs, lenders may also be more willing to approve loans. This can benefit people with moderate credit scores or those seeking larger loans. Easier qualification allows more people to access the capital they need to finance their homes and cars or consolidate high-interest debt.

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Falling interest rates offer many benefits for borrowers, but there can also be downsides. One of the most immediate effects is on savings accounts. When interest rates drop, so do the rates that financial institutions offer on savings accounts and certificates of deposit (CDs). This can be discouraging for people who rely on these accounts for building their emergency fund or nest egg.

While lower interest rates might make borrowing cheaper, they can also contribute to inflation. As more money circulates due to increased borrowing and spending, the value of each dollar decreases. This means that the cost of everyday expenses like groceries and gas might rise, potentially squeezing household budgets despite lower borrowing costs.

Easier access to credit can also tempt borrowers to take on more debt than they can comfortably manage. This can be particularly risky with variable-rate loans, where interest rates can fluctuate. If interest rates rise again in the future, borrowers with high debt loads could struggle to make payments.

Concerned about market volatility?

If the market has you concerned, you may be looking for reliability and stability for your money. Regardless of market conditions, some of the most popular account and asset types for holding your cash tend to stay the same.

See the best accounts for your cash

If the Fed lowers interest rates, it can create an ideal environment for certain strategic financial moves. Here are some key areas to consider:

• Refinance existing debt. When interest rates drop, it presents a prime opportunity to potentially lock in lower interest rates on your existing loans. Consider refinancing your mortgage or auto loan or consolidating high-interest credit card debt into a lower-rate loan. Lower interest rates can significantly reduce your monthly payments and free up cash for other needs.

• Pay down debt faster. While refinancing can help, you can also leverage lower interest rates to pay down your existing debt more aggressively. With smaller interest charges, a larger portion of your payments can go toward the principal, accelerating the speed in which you can pay off your debt.

• Fixed income investments. Bonds typically benefit from falling interest rates. As new bond issues offer lower yields, existing bonds with higher rates become more attractive, potentially increasing their value. Consider investing in bonds or bond funds to potentially capture these gains.

• Stocks. Historically, lower interest rates can lead to a more bullish stock market. Growth stocks may perform well because lower discount rates mean future cash flows are worth more now. Dividend stocks might also benefit investors as they shift away from interest-bearing accounts to seek the potential for higher returns. However, remember that the stock market is influenced by various factors, and past performance doesn't guarantee future results.

• Consider if a large purchase now makes sense. If you've been putting off a significant purchase like a car or home improvement project due to high borrowing costs, a drop in interest rates could signal the perfect time to move forward.

• Build an emergency fund. A low interest rate environment can lead to a recessionary environment. If the financial constraints of higher inflation and interest rates have depleted your emergency fund, be sure to rebuild it to cover at least three to six months of living expenses in the event you lose your job in an economic downturn.

No matter what action you're considering to take advantage of lower borrower interest rates, be sure to do your research and maintain a long-term perspective. Carefully weigh the terms and conditions before refinancing or taking out new loans. Also keep in mind that lower interest rates likely won't last forever.

By understanding how falling interest rates can impact your finances, you can make informed decisions to potentially save money on debt, explore investment opportunities and make strategic purchases. It's important to think about both the benefits and drawbacks of falling interest rates when making financial decisions.

Consult with a Thrivent financial advisor to help you navigate this environment and make informed choices based on your individual circumstances and risk tolerance.