The Federal Reserve’s recent quarter-point interest rate cut was met with cheers for debtors and jeers from savers. The reduction was the second this year, after 11 years of no cuts.
When markets move, it’s easy to have a knee-jerk reaction. That’s a setup for mistakes. With rates expected to dip again, be mindful of what not to do.
Don’t load up on debt
While it may be tempting to take advantage of lower rates by borrowing more, at some point rates will rise again -- and so will your interest payments, warns Gregory Leo, chief investment officer at IDB Bank in Manhattan.
Don’t stop saving
When interest rates go down, you can feel less incentivized to save money. “But having money in the bank has benefits that go well beyond a 1% or 2% return. It’s an emergency cushion in a pinch — which can keep you out of credit card or other debt — and a way to reach your financial goals. Your savings rate shouldn’t drop when your interest rate does,” says Arielle O'Shea, investing and retirement specialist at NerdWallet.com.
Don’t chase yields
As rates decline, it’s easy to think it’s a good time to look for higher yielding investments. Not so fast. Says Leo, “Often these higher yielding alternatives contain higher risk.”
Don’t make dramatic moves
Keep your short and long-term financial goals in mind. Says Robb Granado, chief operating officer of CommonBond.com, a financial technology company, says, “The fundamentals of sound financial management don't change too much with modest fluctuations at the highest macroeconomic levels.”