After hitting a 23-year high, the Federal Open Market Committee (FOMC) cut interest rates by 0.5 percentage point at its September meeting. This is the first rate cut since 2020, and there is a possibility of further rate cuts before the end of the year. For consumers, the cut means an end to two and a half years of the highest interest rates in decades.
Yields on certificates of deposit (CDs), money market funds, and high-yield savings accounts have already fallen since the Fed meeting. Given this development, you may be wondering where to put your money. At the very least, how to preserve the money you have.
stubbornly high cost of living
Although inflation has cooled significantly since the pandemic, concerns about rising costs in many areas of daily life remain. Household debt increased by $109 billion to reach $17.8 trillion in the second quarter of 2024, according to the latest Household Debt and Credit Quarterly Report.
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Auto loans increased by $10 billion, mortgage balances increased by $77 billion, credit card balances increased by $27 billion to $1.14 trillion, and the average customer balance was nearly $6,500. Home equity lines of credit (HELOC) limits increased by $3 billion, the ninth consecutive quarterly increase. The good news is that the Fed’s interest rate cuts will generally make borrowing cheaper, even though funding costs are still rising.
Jake Skelhorn, CFP at Spark Wealth Advisors, says that despite recent rate cuts, interest rates are still at their highest levels in more than a decade. “For expenses that are expected to be 1 to 5 years in the future, such as a down payment on a home, wedding, or vacation, you may want to consider locking in a price, such as a CD. There is a high possibility that
mortgage loan
The rent you pay every month is money you’ll never see again. However, buying a home and paying off the mortgage can help you build equity. It’s a valuable asset that increases in value over time and is a great place to put your money.
Many home buyers wait to purchase a home because of high interest rates. Historically, however, interest rates remain relatively low. In the 1970s, mortgage interest rates reached 12.9%. In the 1990s, the average was about 8%. In the 2010s, interest rates ranged from 3.74% to just over 5%. Currently, mortgage rates are hovering around 6.3% for 30-year mortgages (with some fluctuations after the Fed rate cut).
Alex Blackwood, co-founder and CEO of Mogul Club, a fractional real estate investment app, said: “The lower federal interest rates will bring more people into the housing market. This in turn makes home ownership cheaper and more valuable in the buyer’s market in the short term. With further rate cuts expected next year, some buyers may pause their purchases until further rate cuts occur. Now is the time to buy.”
This also makes the housing market more competitive and increases home values in the long run. “If buyers wait too long, the market will shift to a competitive bidding seller’s market as supply becomes limited and demand increases,” Blackwood added.
Derrick Barker, co-founder and CEO of Nectar, advises potential home buyers that timing the market is not a good idea. “My advice about timing the market is don’t do it. Real estate is unique and some properties and locations may not be available. Once you find a property you really like and can buy, You should buy it.”
loan
The Fed recently lowered interest rates, but if you have a fixed-rate loan, nothing changes. On the other hand, if you take out a new car loan or refinance your home loan, your financial institution’s annual interest rate will be lower. Lowering interest rates will help a little now, but will help even more later because if interest rates continue to fall, it will be easier to borrow money. You’ll pay less interest and potentially lower your monthly payments.
savings
The Fed’s rate cuts will likely reduce the annual percentage yield (APY) or interest earned on bank deposits. Although you’ll earn less on short-term products like savings accounts and money market funds, there’s no need to change your habits when it comes to building your emergency fund, even though you’re used to yields of up to $1 million. In some cases, it can exceed 5%.
Interest rates haven’t always been this high. In the 1980s, savings interest rates soared to 8%, but deregulation made it impossible for banks to maintain these rates, leading to bank failures. In the 1990s, interest rates fell from 4% to 5%. However, in the 2000s, the savings rate fell further to 1% to 2% and remained there until the 2008 financial crisis, when interest rates fell to historic lows below 0.25%.
So even if interest rates drop, you can still earn a lot of interest, especially if you keep your money in a high-yield savings account. Plus, you never know when you might need easy, penalty-free access to your funds.
stock
You may be hesitant to put your hard-earned cash into the risky stock market, but it usually pays off. Historically, the market’s average annual return has been around 10%. That alone makes long-term investing in stocks one of the best places to put your money and beat inflation over the long term.
CD that can be stored for a long time
If you don’t plan on using the money in the near future, consider moving it out of your checking or savings account and into a CD. You can lock in your rate before it plummets. Today, many high-yielding accounts still offer APYs above 4% and 5%. Keep in mind that long-term CDs usually earn you a higher rate than short-term CDs. Also, if you don’t know when you’ll need the money, consider opening multiple CDs with staggered maturity dates or laddering your CDs.
“Alternatives to high-yield savings accounts for planned spending one to five years out should include CDs and government bonds,” Skelhorn says. “Although they are less liquid, they offer a guaranteed interest rate for a certain period of time, which is not the case with high-yield savings accounts.”
Treasury bills
Similar to CDs, if you’re looking for a place to stash your money in a high-interest account, Treasury bills and long-term savings accounts are good choices. You can still get around 5% on some T-bill terms, but with the Fed’s interest rate cuts, this rate may only last for a while. Also, keep in mind that you won’t have to pay state or local taxes on your income, although your interest rate may be a little lower.
real estate
One place where you can generate income even in lieu of Fed rate cuts is through involvement in rental real estate. You may be surprised to learn that 72% of single-family rental properties are privately owned, according to data from Pew Research. When you buy and maintain rental properties, you can profit from recurring income and appreciation gains when you sell or refinance the property. The market is currently tight, but if interest rates fall, it could open up soon.
conclusion
Despite recent rate cuts, interest rates remain high. Skelhorn makes arguments about where money should and shouldn’t be put. “The worst place to keep extra cash other than under your mattress is in a checking account that is likely to earn less than 0.1% APY. The FDIC insures high-yield savings accounts, so checking If you leave it in your account or in cash, you will miss out on risk-free interest (up to FDIC limits).”
It’s a personal choice as to where the best place to put your money is when interest rates start to fall. That said, it’s best not to take drastic action based solely on Fed rate cuts. Even if the Fed cuts rates further, investing in real estate, increasing contributions to retirement accounts, creating an emergency fund, moving money to a money market account, or using penalty-free CDs are all good bets .
