How Much Money Can You Save After the Interest Rate Cut

Written By:

Edited By:

Oct 22, 2024

How Much Money Can You Save After the Interest Rate Cut

Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.

Although the Federal Reserve cutting the interest rate for the first time in 2024 by a few basis points might not seem like a huge deal at first glance, it affects every financial product you have in your portfolio and financial life, from savings accounts to your mortgage. When an interest rate cut happens, the first course of action should be to analyze your current financial situation and see how and when you might be able to save money.

In this article

What a Fed rate cut means

An interest rate cut refers to the Federal Reserve's rate decision to lower the federal funds rate, which is the benchmark interest rate for lending between banks. This rate influences the interest rates for various financial products, such as mortgages, credit cards, savings accounts, stock market and certificates of deposit (CDs). The decision comes after studying the job market, inflation numbers and consumer spending. The Fed often cuts rates to stimulate the U.S economy, make borrowing cheaper, and encourage spending.

Start earning 4.30% APY with a Bread Savings 1-year certificate of deposit

FDIC insured. Keeping your money safe
Highly competitive rates. Earn interest immediately.
No hidden fees. Plus, no monthly maintenance fee
$1,500 opening deposit. Simple to fund and manage

Open CD

Where can you save money after the interest rate cut?

Switching money out of savings accounts

Interest rate cuts impact high-yield savings accounts, which currently offer some of the best annual percentage yields (APYs) in recent memory (Or at least post-2008). For example, a top savings rate could be up to 4.50% APY or something in and around the region. That being said, if the Fed cuts rates, the APY on these accounts will likely decline, meaning you'll earn less interest on your savings.

Above is an example of potential earnings from high-yield savings accounts at different APYs based on an initial deposit of $20,000 over 12 months: The higher the APY, the more you earn. If rates fall by 50 basis percentage points (0.50%), and your APY drops from 4.50% to 4.00%, you could miss out on approximately $100 in interest earnings over a year based on a $20,000 balance.

If interest rates continue to drop, you might want to consider switching to things like CDs. For example, you could have $10,000 sitting in a high-yield savings account that used to earn you 4% interest. But rates drop, and now you’re only getting 2%. To get a better return, you decide to put that money into a 1-year certificate of deposit (CD) offering 3.5% interest instead. While the CD locks up your money for a set term, it gives you a higher and fixed interest rate, which means you'll earn more over that year compared to leaving it in the savings account with the lower rate.

Mortgage rates and home loans

After a Fed rate cut, mortgage rates often decrease, making it an opportune time for homebuyers and homeowners to save on their mortgage payments. This is particularly important for a housing market that many have defined as “stuck” for quite some time, due to higher mortgage payments related to high interest rates. For example, if someone purchased a home in 2020 and has a fixed interest rate well below 4%, then even if they outgrow their existing home and want a new one, they will be loathe to trade their existing low fixed interest rate for a new one. A drop in interest rates can help assuage this problem, and allow more people to sell bringing more stock available inventory to the housing market.

Homebuyers. If you are purchasing a home, a lower mortgage rate can mean significant savings over the life of the loan for yourself. This gives you many more options in terms of budgeting as a lower monthly mortgage payment will allow you to budget for a better home, or allow you to save more money than you were planning.

Refinancing homeowners. Existing homeowners can refinance to take advantage of lower interest rates, reducing monthly payments and the total interest paid. Many people reading this might have bought a home with higher interest rates than they were comfortable with, with the intention to refinance once interest rates went down.

Here's an example of how an interest rate cut affects mortgage payments for a $300,000 loan over 30 years:

In this case, a 1% rate reduction saves about $183 per month, totaling $2,196 in savings annually and $65,880 over 30 years.

Credit card debt and personal loans

Fed’s interest rate cuts can lead to reduced interest rates on credit cards and personal loans, lowering your borrowing costs. For those with existing debt, this could mean smaller monthly payments or the opportunity to pay off the debt faster.

Lower interest on balances. A rate cut can help reduce the cost of carrying a balance on your credit card.
Refinancing personal loans. If interest rates drop, consider refinancing your personal loan to reduce the interest and monthly payments.

If your credit card rate drops from 15.5% to 14.5% on a $10,000 balance, you save $100 annually in interest costs.

Get a Personal Loan Even If You Have Bad Credit with AmONE

Use AmONE to Get a Personal Loan

If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
With personal loan interest rates rising, now could be a great time to find a personal loan. Through our partner AmONE, you could get matched to a lender who could offer as much as a $50k loan with rates as low as 5.99% APR.
Approval and loan terms vary based on applicant qualifications. Not all applicants will qualify for the full amount or lowest available rates. It takes minutes to see your results. And don't worry- filling out the form won't hurt your credit score and is free, so why not give it a try?

See How Much You Can Get Through AmONE Loans

Auto loans and car financing

Auto loans also benefit from lower interest rates, which can reduce monthly payments. When the Fed cuts rates, car buyers may qualify for better loan terms, and current car owners can refinance to save on interest costs.

For a $20,000 auto loan, an interest rate reduction from 5% to 4% can make a noticeable difference and save you about $9 per month, or $108 annually.

How to maximize your savings and investments with lower interest rates

Pay down high-interest debt

When interest rates drop, it's a good time to pay down high-interest debt, like credit cards, personal loans, or car loans. Lower interest rates mean you'll pay less money on borrowing costs, which allows you to pay off the original debt (the "principal") faster and save money on interest payments.

Say you have a credit card balance of $5,000 with a 20% interest rate. Each month, a big chunk of your payment goes toward paying interest, not actually reducing the debt itself. Now imagine interest rates drop, and that rate on your card goes down to 15%. That means more of your payment goes toward paying down the principal, and you’ll pay off your debt faster while saving money on the interest you would have been charged.

Diversify to products with a higher yield

When interest rates go down, the return you get from things like savings accounts or CDs also drops, so people start looking for investments that pay more. This is called "chasing yield" – you're trying to find something that gives you a better return on your money. Savers need to be wise in such a situation.

Think of it like this: you’ve been putting your savings in a high-yield savings account that was giving you 4.5% interest. But when rates drop, that interest drops to 4 or 3.5%. Now, your money isn't working as hard for you. So, you might start looking into other options that pay better, like dividend stocks, corporate bonds, or real estate investments, which can offer higher returns. Just like shopping for a deal, you’re searching for a better way to grow your money since your old “go-to” option isn’t paying as much as it used to.

Claim your $20 bonus investment

In under 3 minutes, start investing spare change, saving for retirement, earning more, spending smarter, and more.
Make your first successful Recurring Investment (min $5) - get your $20 bonus within 10 days of following month
Over 13M All-Time Customers
Over $22B Invested

Download Acorns

Refinance all your existing loans

As mentioned above, refinancing means taking your current loan and swapping it out for a new one with better terms like a lower interest rate. When the Federal Reserve cuts rates, it often means loans become cheaper, so it’s a great time to see if you can save money by refinancing. For example, if you have a mortgage, car loan, or personal loan, refinancing to a lower rate can reduce your monthly payments, making them more affordable, and lowering the total amount of interest you pay over the life of the loan. Even a small rate cut, like 0.5%, can add up to big savings over time.

Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.

Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.

We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.

Images appearing across JoyWallet are courtesy of shutterstock.com.

Benjamin is a writer and entrepreneur who spent 15 years in Asis involved in the real estate and financial services industry. He currently writes about finance, real estate, geopolitics, and short stories involving his cat from Argentina named Tuki. He has written for The Motley Fool, SuperMoney, and other online and offline publications spanning the globe.

Share this article