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Lower interest rates and your wallet

As you’ve likely read in financial headlines recently, interest rates are falling. So, what does that mean for you and your finances? Here are some factors to consider.

Your existing debt may be more manageable. A rate cut by the Fed may cause interest rates on credit cards, home mortgages, home equity loans or lines of credit, and business loans to go down. The terms of your debt will determine if you benefit from the reduction. Variable or adjustable rates typically fall in this category. Fixed rate debt, however, will not budge.

Refinancing may be worthwhile. This may be a good time to refinance a high-interest fixed rate loan. Student loans, home mortgages and business loans are top prospects. Run the numbers to determine whether it makes sense to refinance. Generally speaking, refinancing to a lower interest rate is most beneficial for large loans with 10+ year repayment periods. Savings diminish when the repayment period of your refinanced loan extends beyond the length remaining on your existing loan. Likewise, accelerating your repayment schedule can cut interest costs, but can result in higher payments.

Borrowing can be more affordable. Low interest rates are especially desirable when you need to borrow money to make a large purchase. Young wage earners with long careers ahead of them can benefit by locking in low interest rates to purchase a first home, a new car, or appliances. Businesses can invest in facilities or equipment. Adjustable rate loans tend to be cheaper than fixed options, but they do carry more risk as interest rates may rise in the future.

Interest income shrinks. Retirees who rely on interest income from savings and certificates of deposit are most affected when interest rates drop. If you’re in this category, you may need to reduce your spending. If the stock market remains in good shape, dividend income may continue at the same or higher rates.

It becomes harder to save. When interest rates fall, traditional savings accounts and certificates of deposit do not deliver much in the way of returns. You may feel less motivated to save when earnings are low. The practice of setting aside money for the future is still important for your financial security. Consider ways to diversify your savings, perhaps by investing in stocks and bonds according to your risk profile.

Financial planning is as important as ever. You can’t control interest rates. But you can control how you manage your finances. Make financial planning a priority. With sound advice and strategic saving and investing, you can make the most of any market.

Randy Groff, ChFC, CLU, CRPC, is a financial adviser with Ameriprise Financial Services, Inc., in Marshall.

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