As we move further into 2025, clients have been asking about interest rates and what the recent fluctuations could mean for their personal finances. We recently covered this topic on an episode of the If Money Were Easy podcast, which you can watch below. While interest rates might not be the most thrilling topic (unless you’re a financial planner!), they can have significant implications for your savings accounts, mortgages, and other aspects of your financial life.
Let’s explore how fluctuating interest rates can impact your finances.
Understanding the Fed’s Role on Interest Rates
First, let’s set the stage. Following the 2008-2009 financial crisis, the Federal Reserve (the Fed) brought lending rates down to near zero and left them there for six years. Indeed, compared to historical levels, even well beyond 2014, interest rates remained low, especially during the early days of the pandemic. They finally started to rise more significantly in 2021 as the Fed fought inflation. We all got accustomed to this low-interest environment, which made borrowing more affordable but didn’t benefit savers or bondholders.
The Fed manages interest rates to balance inflation (targeting around 2%) while maintaining strong employment levels. It’s a delicate balancing act – like moving grains of rice from one side of a scale to another, trying not to disrupt either side too much. When they increase rates, they’re attempting to slow down the economy and temper inflation by introducing “friction” into the market. When they decrease rates, they’re trying to stimulate spending and investment.
Between mid-2022 and 2023, the Fed raised interest rates 11 times to combat rising inflation, before starting to drop them again in late 2024. These rapid changes created a topsy-turvy environment for consumers who suddenly had to pay attention to interest rates in ways they hadn’t needed to for years.
What This Means for Savers
If you’re a saver, you’ve likely noticed that those attractive high-yield savings account rates of 4-5% started to fall, only to flatten out between 3.5% and 4.5% so far in 2025. Rates were widely expected to drop this year, but as of this date the Fed has not taken any rate-cutting action, so cash investments like money market funds and high yield savings accounts remain attractive.
Important reminder: Avoid keeping significant amounts of cash in regular checking or savings accounts if you can. According to the Federal Deposit Insurance Corporation (FDIC), the national average interest rate for savings accounts at major banks is only 0.41% as of early 2025 – well below what you can get from high-yield alternatives, which still offer rates above 4% at many banks.
At Abacus, we typically recommend keeping an emergency fund of three to six months of living expenses in a high yield savings account that is easily accessible to you– more if you have a lower risk tolerance or run your own business. Beyond that emergency fund, consider investing your money where it can work harder for you and potentially outpace inflation.
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Interest Rates Impact on Debt
Credit Cards
Falling interest rates primarily benefit consumers with variable-rate debt, including credit cards. However, even with decreases, credit card interest rates remain high. While rates might drop, they’re still significantly higher than most other forms of borrowing. According to the Federal Reserve, the average credit card interest rate in early 2025 still hovers around 21%.
Bottom line: Don’t use declining interest rates as an excuse to rack up credit card debt – it’s still extraordinarily expensive to carry a balance.
Mortgages
Many people assume that when the Fed lowers interest rates, mortgage rates will automatically follow suit. However, the relationship isn’t that straightforward. Mortgage rates are more closely tied to the 10-year Treasury yield and are influenced by factors like job growth, inflation, and the broader economic environment.
While we’ve seen some rate decreases, mortgage rates are expected to remain relatively stable throughout 2025. We’re not likely to return to the 2-3% rates we saw during the pandemic anytime soon. According to the Mortgage Bankers Association, the average 30-year fixed-rate mortgage is projected to hover around 6.0% through most of 2025.
For prospective homebuyers, the current environment remains challenging. Housing supply remains constrained as many homeowners with 3% mortgages are reluctant to sell and take on a new loan at today’s higher rates. This has kept home prices elevated despite the higher interest rates.
Our advice for homebuyers in 2025:
- Buy a home you can truly afford, not just what the bank says you can borrow
- Save for a substantial down payment without depleting your emergency fund
- Factor in all future expenses (potential childcare costs, retirement savings, etc.)
- Consider working with a financial planner to assess if the purchase fits your overall financial plan
Home Equity Lines of Credit (HELOCs)
Unlike most mortgages, which have fixed rates, HELOCs typically have variable rates that adjust quickly when the Fed changes its benchmark rate. During the pandemic, many homeowners took advantage of low rates to finance renovations and home projects. As rates climb, this becomes less attractive.
When rates decrease, we may see increased activity in home renovations as homeowners with low fixed-rate mortgages choose to improve their current homes rather than move and take on a new mortgage at a higher rate.
Auto Loans
Auto loans are directly impacted by interest rate changes. Remember those “0.9% APR financing” commercials? I’ve noticed they’ve been rare lately, and average auto loan rates have been much higher. If we see decreasing interest rates, financing a vehicle may become somewhat more affordable.
That said, with the average car payment now approaching $750 per month according to Experian’s State of the Automotive Finance Market report, it’s important to consider whether such a significant monthly commitment makes sense for your overall financial picture. Remember, cars are depreciating assets – there’s nothing wrong with driving your 12-year-old vehicle if it’s still running well!
Interest Rates Impact on Business Owners
For small business owners, lower interest rates can make financing more attractive, potentially encouraging investment in growth initiatives like hiring additional staff or purchasing equipment to improve efficiency. This can have positive ripple effects throughout the economy as businesses expand.
Interest Rates Effect on Student Loans
If you have federal student loans with fixed interest rates, the Fed’s rate cuts won’t directly impact your payments. However, if you have private loans with variable rates, you should see some relief as rates decrease.
The Bottom Line
While we can’t control the economic environment, we can make informed adjustments based on reality. Our experience with interest rates is uniquely tied to how we’ve lived through previous economic cycles – what seems like a high mortgage rate to millennials and Gen Z might seem reasonable to those who bought property in the early 1980s.
What’s important to remember is to control what you can control. Understand how interest rates affect your specific financial situation and adjust your strategy accordingly:
- If you’re saving: Keep emergency funds in high-yield accounts but don’t hoard excessive cash if you can
- If you’re borrowing: Consider refinancing variable-rate debt if beneficial
- If you’re investing: Maintain your long-term perspective regardless of rate fluctuations
We’ll live through many more economic cycles in our lifetimes. The best approach is to buckle up and make the current interest rate environment work for your personal financial situation.
Learn More About Interest Rates
Want to explore more more about how fluctuating interest rates can impact your money? Listen to Episode 61: How Do Interest Rates Influence Your Money? on your favorite podcast streaming platform or watch on YouTube, where Mary Beth and Neela break down what you need to know about the current interest rate environment.
