This has been one of the most volatile weeks in the history of the stock market. We alternated haphazardly between record highs and record lows, all because of the coronavirus.
We have no idea how much longer the coronavirus will continue to be a drag on the market, but it seems safe to say that it’ll be in the public consciousness at least for the coming month or so, especially as the economic effects of the virus become known.
As such, on Tuesday the Federal Reserve slashed interest rates to try to stimulate the economy and prevent further slowing, and many investors predict they will cut interest rates even further at their meeting on March 18.
Whether you knew about this rate cut or not, it may very well have an effect on you in some very tangible ways. Interest rates on everything from mortgages and student loans (nice), to savings accounts and CDs (not so nice) will be lowered significantly.
What does this mean for you? That’s why I wanted to write this post.
Are You Saving?
I’ve discussed before the importance of investing in the stock market especially instead of holding large sums of money in a savings account, but this becomes even more important at times like this.
Even if you have a high-yield savings account, you’re likely going to be experiencing far lower interest rates, meaning that your money will be returning far less over time.
I have an account which previously had a 1.6% interest rate. But after this week’s cut, it’s been lowered to 1.1%, and if the interest rate is cut again, then it’ll likely go down to 0.6%.
Now of course I always think you should keep a 1 month buffer in your checking account, no matter the interest (or lack thereof), but beyond that, it’s becoming less and less tolerable to store large sums of money in savings accounts that will return very little.
This is so, especially when stocks are cheap right now with the market falling over 12% in the last few weeks. While the volatility is scary at the moment, long-term investors should have tons of opportunities to get stocks at a cheaper price than we’ve seen for months.
Our own Foundational Investments portfolio has made several buys this week which I believe will pay off in the weeks to come, as the market regains its composure.
So personally my suggestion is to put non-essential savings into safer long-term investments.
On the positive side, interest rates on debt will be coming down as well. It’ll be a great time to refinance a mortgage, student loan, or other debt. I’d give it a few weeks for the anticipated second rate cut to be done, but certainly it’ll be a great time to either borrow at great rates, or refinance existing debts to save quite a bit in the long-term.
I don’t have much to say on this, but it’s just something to watch out for if you’ve been wanting to borrow money, or get a better rate on existing loans.
Oh, and one other kind of interest rate could be affected by this as well: interest rates on margin. So if you like to trade with margin, this will definitely help.
I just wanted to give you a heads up about this recent change and how it could affect you personally in the short-term. Interest rates could come down a lot further before they return to their current levels, and it’s important to know what opportunities and risks this opens up to you.
Definitely try not to keep an excess of funds in savings accounts, as those funds will return very little. However, if you were thinking of borrowing, say to buy a house, go to school, etc, it’s a great time to do so.