How Interest Rate Cuts Affect YOU as a Consumer

Let’s talk about the buzz around interest rates in 2024. You might have heard about the Federal Reserve's decision to cut rates, and while it sounds like big-time financial talk, I know the real question you’re asking is: how will this affect your wallet and your day-to-day spending?

What Do Interest Rate Cuts Mean for You?

When the Federal Reserve (Fed, for short) lowers interest rates, borrowing becomes cheaper. That could mean lower rates on mortgages, car loans, and credit cards. It also means lower rates on HYSA (we go deeper into the impact of interest rate cuts on savings accounts here). 

The goal of interest rate cuts? To get people spending more and keep the economy chugging along. 

Buying a Home

Lower interest rates can make home loans more affordable. If you’re in the market for a home, this is good news—lower rates can mean lower monthly mortgage payments and potentially less interest paid over the life of the loan. 

Let’s look at an example: in October 2023, the average 30-year fixed-rate mortgage reached 7.79%, one of the highest points of the year. On a $500,000 home, the monthly payment for principal and interest at this rate would have been approximately $3,594.

Now, with rates closer to 7% and expected to keep dropping, that same $500,000 home would cost about $3,327 per month. This results in a monthly savings of around $267 compared to last year. Over the life of a 30-year loan, this difference adds up to ~$96,000 in savings just from the lower interest rate. 

There’s a catch: traditionally, when interest rates drop, more people jump into the housing market, increasing demand and driving up home prices. This trend is only made more complicated by the ongoing housing shortage, which continues to push prices higher, making it even more challenging to find affordable homes despite lower mortgage rates.

Here are 4 quick tips to keep in mind when buying a home:

1. Be uber-clear on closing costs – they can add up fast, so know exactly what you're signing up for. 
2. Love your lender and real estate agent – these are your partners in the process. If you don’t like them, love them, trust them: keep looking. 
3. Have an emergency fund ready – owning a home can come with a plethora of unexpected expenses, and you want to be prepared for anything that pops up.
4. Get serious about homeowners insurance – start researching now! I can’t tell you how many clients have faced floods or other disasters within their first year of owning a home. It’s worth it, I promise. Plus, even if your state doesn’t require it, your lender might, to protect their financial interest in the home. 

Buying a Car

Car loans also tend to get cheaper when interest rates fall, making this a better time to finance a vehicle. If you’ve been eyeing a new car, this could reduce the monthly payment and save you some money in interest over the loan’s term. However, just like with home buying, this doesn’t mean you should rush into a purchase.

Even with lower rates, it’s important to consider the total cost of ownership. Between insurance, maintenance, and depreciation, a car can quickly become more expensive than it seems on paper. So before you head to the dealership, take a hard look at your budget and make sure this decision aligns with your financial goals.

Credit Card Debt

When interest rates drop, credit card APRs drop as well and it's a chance to make your credit card work harder for you. Lower rates mean less interest on any balance you carry, allowing you to focus on eliminating debt more quickly. Instead of seeing this as an opportunity to borrow more, think of it as a moment to update your financial strategy to pay off balances faster and maximize your rewards.  

The real win with credit cards is avoiding carrying a balance altogether. Using your credit card responsibly—aka, paying it off in full each month—means you can take advantage of all the benefits without ever paying a cent in interest, and that’s the ultimate goal. 

Credit cards are a tool for building credit and earning rewards, not a way to finance everyday expenses. If you don’t currently have debt on a credit card, let’s keep it that way by ensuring that you're always paying off what you spend, even as interest rates drop. If you do have debt on a credit card(s), stay committed to your debt repayment plan. Don’t know where to start with paying off your credit card debt? We build debt repayment plans for our clients every day; reach out and lets chat options!  

So, How Should You Navigate 2024’s Interest Rate Cuts?

First, this is an exciting opportunity! A high interest economy has a lot of great pros and so does a low interest rate economy. Here are some best practices.

Just because money seems cheaper, doesn’t mean it’s a good time to stop budgeting or become carefree about debt. Interest rates don’t change your financial goals, your values, or how you want to live your life. Just because it feels easier to borrow money doesn’t mean you should start financing every purchase. If you’re in a solid financial position, these lower rates can be a great opportunity to take steps toward your financial goals. But that’s the key—this is about your goals, not the Fed’s agenda.

Here’s what we recommend:

1. Stick to Your Budget: Remember, budgeting is radical $elf-care. Revisit your budget, stay aligned with your values, and don’t let lower interest rates trick you into spending more than you can afford.
2. Avoid Impulse Buys: It's tempting to finance those items you’ve had your eye on, but think long-term. Can you truly afford that loan or credit card balance if rates rise again in the future?
3. Refinance Wisely: If you have existing high-interest debt, this could be a good time to refinance or consolidate at a lower rate. But don’t just jump into this because it sounds smart—run the numbers, understand the terms, and make sure it serves your overall financial picture ⭐️We love balance transfer cards over refinancing as a tool to pay off high interest debt; you can read our free balance transfer guide here. 
4. Prioritize Your Emergency Fund: Don’t let lower rates lull you into a false sense of security. Use this time to shore up your emergency savings. You want a cushion before anything else.
5. Keep Your Eyes on Wealth-Building: If you’re saving for retirement, a home, or even just financial peace of mind, stay the course. Building wealth is about consistency, not reacting to every economic shift.

At the end of the day, interest rate cuts can create opportunities, but they can also be traps if you’re not careful. The goal is always to stay aligned with your values and your long-term vision for financial freedom.

Don’t get caught up in the hype. Use this moment to evaluate where you are, where you want to go, and how you can make these changes work for you. The economy might shift, but the power to build wealth and make smart decisions is always in your hands.