How The Fed’s Rate Cut Impacts Your Wallet: Time For A Financial Stress Test

As we’ve all seen, the Federal Reserve recently decided to cut interest rates by 50 basis points, marking their first rate cut since March 2020. While there’s a lot of noise about how this helps businesses and the economy, let’s get down to what matters most: how does this impact you as a consumer?

But honestly, a lot of people are being a bit more cautious when it comes to borrowing right now due to their budget. Inflation continues to deflate how we money. And I’m looking at how consumer debt continues to mount high with compounding of not only interest but usage. I know that you’ve probably seen commentary about what this cut means, but in my perspective, it rarely speaks to our wallets. This newsletter edition is going to touch on how you: budget, spend, save, and invest.?

Borrowing: What Does This Mean for New And Existing Loans?

If you’re planning to borrow money—whether it’s for a mortgage, car loan, or personal loan—this rate cut means you’ll likely pay less in interest than before. That’s great news if you’re in the market for new debt.?

But here’s the catch: If you already have a fixed-rate loan, your payments won’t be impacted. Fixed rates are locked in for the life of your loan, so you won’t see any savings there.

However, if you have variable-rate debt, such as credit cards or variable-rate loans, you could see your interest rate go down slightly. But don’t expect a dramatic difference. The Fed’s rate cut mostly impacts new loans, so this is more of a small win for those already holding variable debt. I talked about this in my recent short-form video.?

Why I Still Love High-Yield Savings Accounts (HYSA) and CDs

With the rate cut, we may see a drop in those juicy APYs on HYSAs and CDs. If you’ve been enjoying high rates, don’t be surprised if they take a dip. But here’s my take: I still love HYSAs and CDs as safe places to park your cash. Even with lower yields, they’re better than traditional savings accounts and offer a low-risk option for growing your money over time. It’s all about steady growth—especially for those of us who prioritize having an emergency fund or saving for future goals. I love them so much that I talked about how to not only open up a HYSA but leverage them with your goals with PopSugar (read it here).?

Don’t chase the rate as they ease, but you chase how much you can save for the pockets of financial goals that you have coming up. No matter if it’s in a sinking fund for the holidays or a downpayment for a car/house later on. You might not save your way to wealth, but you can save your way to breathing more comfortably later. Oh, and emergency funds.?

Investing: Stay the Course

I have seen so much commentary about how the market popped when the interest rate cut happened. Rate cuts often grab the spotlight, but they don’t directly impact the stock market the same way they do borrowing and saving. The truth is, whether the market is up or down, the principles of investing remain the same: stick to your plan. The same way you invest during tough market times should be how you invest when things are looking good. Compound interest loves consistency.?

That said, it’s always a smart move to check in on your investments. Ask yourself:

• Are my contributions still aligned with my budget? Do I need to adjust?
• Can I add more to my allocation given my financial situation?
• Am I balancing my short-term needs with my long-term goals?

Don’t forget about your retirement plan at work. Take a moment to review your 401(k) or other retirement accounts. Are your current allocations still on pace with your overall financial plan and retirement goals? Make sure you’re contributing enough and that your investments align with your timeline and risk tolerance. Sometimes, after a rate cut, the market reacts in unpredictable ways, so it’s important to ensure that your retirement portfolio is diversified and set up to weather any fluctuations.

If you’re looking for a potential opportunity, keep an eye on the market. We’ve all heard about the Santa Rally—the alleged uptick in stocks that sometimes happens at the end of the year. And that rally hasn’t been sprinkling much in the last couple of years. If you have some cash available for investing, this could be worth monitoring.?

Why You Should Double Down on Paying It Off:

Here’s the reality: Americans are facing record levels of debt. In fact, total U.S. household debt has risen to $17.06 trillion as of Q2 2024. Credit card debt alone has surpassed $1 trillion for the first time, with the average interest rate on cards now over 20%. People are still watching the APR of credit cards and loans bump up regardless of their financial profile. You could be doing right, but the APR will be going up either way. Crazy, right?!

With this in mind, I highly recommend doubling down on paying off your debt, especially high-interest credit cards. Going back to my theory of paying “some” towards your debt, if you can.? While the Fed’s rate cut could slightly lower the interest on variable debt, it won’t affect fixed debt, and the savings on credit card interest will be minimal. Focusing on paying off debt will help you regain control of your budget.

Conducting Your Own Financial “Stress Test”

The Federal Reserve is running a stress test on the economy with this interest rate cut. I want you to do the same with your finances. Here’s how:

1. Look at your budget – Are you overspending? It might be time to do a budget correction to get back on track.
2. Check your savings rate – Where are you parking your money? Even if APYs dip, make sure your savings is in a place that still works for your growth goals. Can you bump up your auto transfers due to looking at your budget correction?
3. Review your debt – Is your current payment plan working? Could you potentially get a better interest rate on any of your loans or credit cards? Refinancing or adjusting payment strategies could save you money.
4. Evaluate your overall financial plan – Are your financial goals still aligned with your income, spending, and debt levels? It’s important to adjust as needed.

When the Fed cuts rates, it’s important to use this time to reassess your financial health. I will keep watching to see what happens as we move through this year into next year, as you know I will. Whether it’s paying down debt, saving for future goals, or investing for the long term, now is a great time to ensure your money is flowing and growing as planned. Staying focused on what you’re doing financially no matter if the reports/readings by the government are fact or fluff. Doing what you can vs worrying about what you can’t is my rule of thumb in this season of the economy (like a TV show).?

As always, if you need more guidance, feel free to reach out or check out my older blog post and YouTube video where I dive deeper into these topics.