From the Expert: Making the most of falling interest rates

When the Federal Reserve lowers interest rates, it starts a chain reaction in the lending industry that’s intended to stimulate the economy. It works. Simply put, falling interest rates reduce your cost of borrowing and give you more opportunity to expand your medical practice. Lower interest rates also give you the opportunity to renegotiate any debt that you currently have.

By securing lower interest rates, you shrink the amount of debt you carry. If your payments go down, your net cash flow increases. A prudent use of this increased cash flow is to build up emergency funds and your investment accounts. In short, save and invest all you can.

Falling mortgage rates

With mortgage rates going down, you should certainly explore refinancing. If the cost of money has gone down, a refinance may give you more control over your cash flow.

Some doctors see the lower-rate environment as an opportunity to buy investment property. Certainly, several of my physician-clients have made good money owning real estate. But my advice is to buy investment property only if you were planning to buy before rates dropped. Remember, falling interest rates and real estate deals are what caused the current market slump. Don't buy if you hadn’t already planned to and definitely don't buy if it’ll compromise the savings needed for your retirement or children’s education. Think things through carefully-with your accountant or financial adviser, if necessary.

Saving money

Even if interest rates are low or virtually nonexistent, you should always hold cash in savings accounts-CDs or money market funds, especially if you’ll need to tap those accounts within the next year or two.

It’s extremely important to identify whether the funds that you save are for long-term, short-term, or “in-between” purposes. Usually, short-term money will be gobbled up completely within six months to a year. This money should never be put at risk in a stock market that can be volatile. If the market behaves poorly right before you need the funds, you may have to liquidate other assets to cover a shortfall. 

If your short-term financial needs are satisfied, then go ahead and explore assets that provide higher, long-term returns. You’ll incur more market risk, but you can minimize it by holding a diversified basket of stocks (large-cap, small-cap, domestic and international, etc.). Mutual funds are a great, low-cost vehicle for investing in each of these categories. Look to a no-load (read: no commission) fund family, like Fidelity or Vanguard, that offers plenty of choices.

The bottom line

Right now stocks are down; that’s why the Fed has offered a “stimulus package”-to help consumers free up more money to spend and invest. Don’t panic now that the market is struggling. It only means that the future is on sale right now and it’s a great time to buy.

Thomas A. Muldowney, a managing director and financial advisor with Savant, has more than 30 years of experience in the financial services industry. Tom previously taught courses for Rock Valley College in Rockford, IL, and is a frequent speaker for corporations and other groups. He’s a Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Retirement Counselor (CRC), Certified Financial Planner (CFP), and an Accredited Investment Fiduciary (AIF.) Most recently, Tom earned a professional designation as a Certified Medical Planner (CMP). He can be reached at tmuldowney@savantcapital.com.