What To Do When Interest Rates Fall?

by Tax Guy - Burlington Accountant on May 9, 2008 Print This Post Print This Post

The U.S.Fed has dropped rates a fair bit lately. Great news if you are looking for a loan or are refinancing your mortgage but no so good news if you have money in your savings accounts. So what should you do when interest rates start to fall?

Emergency Funds

It’s always a good idea to have three months worth of your income socked away in case of emergency. Because of the potential for immediate need, this money should be sitting in your savings or money-market account. But right now the rates on these accounts are so low that inflation actually will erode the value of this money over time. What do you do?

Inflation is the increase in the prices of the things we purchase. If the cost of living increased 4% and your savings are earning 3%, the ability of your savings to buy the same of amount of goods is shrinking. But looking for better yielding products is not recommended.

CD’s may impose penalties for early withdrawal and bond yields are subject to interest rate risk as well. Placing your short term emergency fund in the stock market can be a disaster if your portfolio value goes down just at the time you need it.

Look around a t better paying savings accounts. You can look BankRate.ca for better deals in your area. Compare these to tax free accounts to see if you will do a little better. But remember that once you move out of more secure and very short term investments to higher paying type investments you will assume more risk of loss so be wise.

ING DIRECT offers high interest savings accounts with great features and no fees. I use their account myself and find them an excellent choice for my emergency funds.

Mortgages & Loans With falling rates comes opportunity! If your loan or fixed rate mortgage rate is higher than what you could get in the market now you should look into refinancing. Refinancing is an excellent opportunity to lower your interest expenses and if you can keep the remaining term on your loan, you’ll probably lower your payments as well (although I suggest making the same payment with a lower interest rate and pay the loan off faster). If you have a high quality credit score, you’ll even be able to secure a lower rate.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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