As a military retiree and a financial planner, I've seen firsthand how the unique challenges faced by the military community amplify changes in the economy and U.S. government policy.
On Sept. 18, the Federal Reserve implemented a larger-than-expected, 50-basis-point (0.5%) interest rate cut, and while many may view this through a broad economic lens, I want to take a moment to look at how this affects military families, in particular.
From deployments to frequent moves and everything in between, the military experience doesn't always directly match the civilian experience. Here's how a decision such as the Fed's can ripple through the personal finances of the military community, impacting everything from savings accounts to mortgage rates.
Lower Borrowing Costs
One of the first things that comes to mind with a Fed rate cut is how it could lower the cost of borrowing. Many military families rely on loans for cars, homes and sometimes even to cover unexpected expenses during a permanent change-of-station (PCS) move or deployment. This rate cut could bring some welcome relief, but it may not be quick or as impactful as the financial headlines might have you believe. Remember, the feds don't set (or cut) the interest rates you and I pay directly: This cut represents a rate cut in terms of what banks pay to borrow money from other banks, and it influences what we pay in the marketplace.
In terms of specific loan types:
- Mortgages: Many military families, including mine, have used VA loans when buying a home. These loans offer significant benefits, such as no down payment, no private mortgage insurance and competitive interest rates. With interest rates trending lower, the monthly mortgage payments on new loans could be more attractive. Based on my conversations with quite a few borrowers, it may be a bit early -- their existing loans carry a significantly lower interest rate -- to talk about refinancing, but if you already have a mortgage, refinancing could provide a little wiggle room in your budget. For those looking to buy, it's a chance to lock in lower rates and make homeownership more affordable or to get a little more bang for your buck.
- Auto loans: I think I can safely say that Americans like our vehicles, and the military community might even take "like" and elevate that to "love." In any case, lower rates mean cheaper auto loans, which could make a big difference if you're looking to buy a new vehicle. This is probably the right time to mention the potential financial benefits of driving your vehicle long beyond the length of your loan.
- Credit cards: If you're carrying credit-card debt, a rate cut could help ease the financial burden a bit. Many military families rely on credit to cover unexpected expenses, whether it's during day-to-day life, a deployment or transitioning out of the service. Lower rates on credit cards mean less interest piling up and a greater portion of your "more-than-the-minimum payment" going toward the principal balance.
Lower Returns on Savings and Investments
While cheaper borrowing is great, the downside is that a rate cut can also mean lower returns on savings and conservative investments. As a financial planner, I've always prioritized building a solid emergency fund and planning for the future. Unfortunately, lower interest rates can make that a bit harder and less rewarding.
For example:
- Savings accounts: Most of us know how critical it is to have a well-stocked emergency fund, especially given the uncertainty of military life. But with lower rates, the money sitting in savings accounts earns even less interest. This could make it a tad tougher to grow that fund to your "target level." Don't get too caught up in this thinking. The important thing is that you have the emergency savings available when you need it. The Fed cut could make it all the more important to shop for the best available rate on your savings.
- Retirement accounts: For those invested in the Thrift Savings Plan (TSP) or other retirement or investment accounts, the Fed's rate cut doesn't directly affect stock fund performance, but it can influence market behavior. Lower rates tend to push the stock market up, which can be good news for those with higher-risk investments. However, if you're more conservative and focused on income investments, like many retirees are, lower rates can be a mixed bag, driving bond prices higher, but interest earnings and income streams lower.
Housing Market
Military families move more often than civilians, sometimes every few years, depending on orders from Uncle Sam. That reality has always made me cautious when it comes to military families and home ownership. Lower interest rates can affect both buying and selling in the housing market, such as when:
- Buying a home: If you're in the market to buy, lower mortgage rates are a huge benefit. They mean cheaper loans and lower monthly payments. When the biggest line item in our spending plan shrinks, that is a positive. Lower rates can make the dream of homeownership more accessible, especially for young families.
- Selling a home: On the flip side, if you need to sell a home, you might face increased competition as others try to take advantage of lower rates, too. More demand could speed up the selling process, which is a beautiful thing when you're racing against the clock to relocate to a new duty station and avoid the possibility of having two home payments. Timing is everything for military families, and declining interest rates could help reduce stress during an already chaotic PCS.
Inflationary Pressures
One concern I have with any rate cut is the potential for it to reignite inflation. If inflation picks up, it can erode the buying power of the military paycheck. It doesn't seem very long since we escaped (or have we?) the challenges on this front.
Final Thoughts
The Fed's recent 50-basis-point rate cut presents both opportunities and challenges. Lower borrowing costs can bring relief, especially with mortgages and loans, but diminished returns on savings and the potential for inflation mean we need to stay vigilant as we monitor our financial plan. Military families are resilient and resourceful, but staying informed and adapting to changes such as these is crucial to maintaining financial stability.
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