Ask a number of people how they feel about declining interest rates, and you will receive a wide variety of answers. Net Borrowers (those who are repaying higher loan obligations than they currently have cash saved) will generally be elated at the prospect of declining rates. Conversely, Net Savers (those whose savings exceed their loan obligations) will generally view declining rates as a negative. Others are on the fence, with no preference.

Finding myself in the Net Saver group, I am sorry to see interest rates declining. Not long ago, we were able to receive 4.5% annual interest on High-Yield Savings Accounts. Today, rates are closer to 3.3%, a reduction of 26.7% on our monthly interest income. Since these accounts carry extremely low risk, the 4.5% rate felt like a windfall.

Interest rates are set by the market, but influenced by the Federal Reserve (FED) as they react to inflation, raising or lowering short-term interest rates, based on current economic conditions. Inflation is generally slowing down, and the FED is reacting by lowering short-term rates. Longer term rates have been following suit, with mortgage rates and bond rates declining.

A quick look at 21^st Century interest rates will demonstrate how significant rate changes have been over time. The current Century came in like a lion, with average interest rates of 6.24%. By the end of the first decade, that rate had plummeted, standing at 0.1% in 2011. Rates stayed near zero until 2023, topping 2% during only 1 year, in 2019. Ensuing years saw rates over 5%, but those are currently dropping under 4%.

Higher returns are generally realized by investors willing to increase their portfolio risk. Older investors, many of whom are Net Savers, show little enthusiasm for increasing portfolio risk. Unfortunately, the tradeoff is a must for those trying to maintain or increase investment income.

Good news is available to investors willing to accept marginally higher risk. Bond prices rise inversely to interest rate changes, and are now gaining value, increasing total returns for investors. Several forms of quality Bond Funds are available to investors, and some are producing results over 4.5%.

Both Mutual Funds and Exchange-Traded Funds (ETFs) can be purchased with no transaction fees, and some of our favorites pay monthly dividends. Look for high quality investments with long track records. While these funds do require acceptance of more risk, they are designed to produce income for investors. Check with your financial advisor if you need guidance.

We understand that falling rates are making Net Borrowers happy, and we can be happy for them. However, as to Net Savers, it was fun while it lasted. Interest rate changes affect everyone.