4 Dumb Money Moves People Make When Interest Rates Drop
Written by
Gabrielle Olya
Edited by
Molly Sullivan
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In September, the Federal Reserve made its first interest rate cut since the early days of the pandemic, reducing the rate by half a percentage point. Because rate cuts can affect numerous consumer products — including savings accounts, mortgages, auto loans and credit cards — some people may be tempted to make money moves to capitalize on lower borrowing rates or move money away from low-risk investment vehicles. However, not all of these moves will pay off.
Here are some of the most common dumb money moves people make when interest rates drop.
Overinvesting in ‘Junk Bonds’
High-yield bonds — also known as junk bonds — can be a wise investment to make when interest rates drop, but they do come with a risk of default.
“Investors may start chasing yields, seeking similar rates to what they became accustomed to when rates were higher,” said Andrew Flores, CFP, a financial advisor with Equitable Advisors. “This generally means moving into more lower-quality debt instruments, such as ‘junk bonds,’ that involve taking on additional credit risk in attempts of getting closer to rates/yields pre-interest rate drop.”
Not Looking For Opportunities To Refinance
Lower rates can work to your advantage if you have any outstanding loans, but it will require some legwork.
“When rates drop, a lot of people tend to maintain ‘status quo’ and do not take the time to review their active loans — auto loans for example — to see if they have the opportunity to refinance and lock in a lower rate,” Flores said. “When rates go down, so does the cost of capital.”
Moving Too Much Money Into Higher-Risk Accounts
It can be alarming to see the interest rate on your savings account fall, but this doesn’t mean you should move your money into higher-risk accounts.
“Moving funds from lower interest rate accounts such as savings accounts into accounts with higher returns could be a mistake, especially if the individual is in the lower interest rate accounts for a purpose that does not align with the purpose of the account that may get a higher return,” said Jeffrey Wood, CPA, CFP, partner at Elysium Financial in South Jordan, Utah.
“For example, if I have allocated a certain amount to an emergency fund in a high-yield savings account and then move those funds to a stock market investment account, those two accounts typically serve different purposes in a financial plan and should not be equated. I still should have an emergency fund set aside where it will not be at market risk.”
Taking On More Debt Just Because It’s ‘Cheaper’
It’s true that you may be able to get better rates on any loans you take out, but this doesn’t mean you should take on more debt that isn’t 100% necessary.
“Lower interest rates lead to more borrowing options — this could be mortgage rates, auto loans or personal loans. This leads people to make purchases they probably should not,” said Chad Gammon, CFP, owner of Custom Fit Financial. “If the person’s income decreases unexpectedly, the extra debt makes life difficult.”
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