After a 23-year high, the Federal Open Market Committee (FOMC) cut interest rates by a quarter of a percentage point during its November meeting. It was the second rate cut this year. And they meet again on December 18, with many economists believing they'll cut rates another 0.25%.
Yields on certificates of deposit (CDs), money-market funds and high-yield savings accounts have already dropped since the Fed’s cuts. In light of this development, you may be wondering where to put your money; at the very least, how to hold on to the money you have.
Stubborn high cost of living
Although inflation has cooled considerably since the pandemic, concerns remain about rising costs in many areas of everyday life. Household debt rose by $147 billion to reach 17.94 trillion in the third quarter of 2024, according to the latest Quarterly Report on Household Debt and Credit.
Auto loans increased by $18 billion, mortgage balances were up $75 billion and credit card balances increased by $24 billion to reach $1.17 trillion. Home equity lines of credit (HELOCs) limits rose by $7 billion, marking the tenth consecutive quarterly increase. The good news is that cuts from the Fed typically make it cheaper to borrow money, although the cost of financing still remains elevated.
Jake Skelhorn, CFP at Spark Wealth Advisors, says that even with the recent cut, interest rates are still the highest they’ve been in 10+ years. “For any planned expenses that are one to five years away — a down payment on a home, a wedding, or travel — it might be a good idea to consider locking in a rate, such as on a CD, in the event that the Fed continues to cut interest rates, which is historically likely.”
Mortgages
The money you pay in rent each month is money you’ll never see again. However, buying a home and paying on the mortgage helps build equity. It is a valuable asset that appreciates in value over time and is a good place to put your money.
Many home buyers have waited to buy a home because of high interest rates. Historically, however, rates are still relatively low. In the 1970s, mortgage rates reached 12.9%. In the 1990s, the average was about 8%. In the 2010s, rates ranged from 3.74% to just over 5%. Today, mortgage rates hover at around 6.08% for a 30-year mortgage (having see-sawed a bit after the Fed rate cut).
Alex Blackwood, CEO and co-founder of fractional real estate investing app, mogul Club, shares his thoughts, ”The fed rate cut will lead to more entrants into the housing market. When interest rates drop, homeownership becomes less expensive, with more value in the buyer's market in the short term. With more cuts anticipated next year, some buyers will pause purchasing until further rate cuts happen. That presents an opportunity for purchasing now.”
That also makes the housing market more competitive, pushing home values upwards in the long term. “If the buyer waits too long, the limited supply and increased demand will shift the market to become a seller's market with bidding wars," Blackwood adds.
Derrick Barker, Co-Founder and CEO at Nectar, advises potential homebuyers that timing the market is not a good idea. “My advice about timing the market is not to do it. Real estate is unique, and some properties or locations are often unavailable. If you find a property that you really like and can afford, you should buy it.”
Loans
Although the Fed recently cut rates, if you have a fixed-rate loan, nothing will change. On the other hand, if you want to take out a new vehicle loan or refinance your mortgage loan, the annual percentage rates from lenders will be lower. The rate cut will help a little now and more later as rates keep falling by making it more affordable to borrow money. You will pay less in interest, and your monthly payments may also be lower.
Savings
It’s likely the annual percentage yield (APY) or interest you earn on your bank deposits will decrease because of the Feds cuts. You’ll earn less on short-term products, like savings accounts and money market funds, but that doesn’t mean changing your habits when it comes to building an emergency fund, although you’ve become accustomed to yields of up to, and sometimes over, 4%.
Rates haven't always been this high. In the 1980s, savings rates soared to 8%, but deregulation led to banking failures as banks couldn’t sustain these rates. In the 1990s, rates fell to between 4% and 5%. However, in the 2000s, savings rates fell even further to between 1% and 2% and stayed there until the financial crisis in 2008, when rates fell to historic lows of below 0.25%.
So, even if rates fall, you still earn significant interest on your money, especially if you put your money in a high-yield savings account. Besides, you never know when you’ll need easy, penalty-free access to your funds.
Stocks
You may be hesitant to put your hard-earned cash into a risky stock market, but it typically pays off. Historically, the market’s annualized average 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 time.
Long-term CDs
If you don’t plan to use your money in the near future, consider moving it out of a checking or regular savings account and moving it into a CD. Before rates take a hit, you can lock in your rate. Currently, many top-earning accounts still offer APYs of over 4%. Keep in mind that longer-term CDs typically earn higher rates than short-term CDs. Also, if you're unsure when you'll need your money, consider opening multiple CDs with staggered maturity dates, or CD laddering.
“Alternatives to high-yield savings accounts for planned expenses that are one to five years away should include CDs & treasuries,” says Skelhorn. “They are less liquid but guarantee you an interest rate for a set period of time, which high-yield savings accounts do not."
Treasury bills
Like CDs, Treasury bills and longer-term savings accounts are a good choice if you're looking for a place to stash your money in an account that pays higher rates. You can still get over 4% on several T-bill terms, but these rates may only last for a while due to the Fed's rate cuts. You’ll also want to remember that although rates may dip a bit, you don't have to pay state or local taxes on earnings.
Real estate
One place that can generate income, even in lieu of the Fed rate cuts, is getting involved in rental real estate. You might be surprised to know that 72% of single-unit rental properties are owned by individuals, according to data from Pew Research. When you buy and hang onto rental property, you can profit from recurring income and any potential gains from appreciation when you sell or refinance the property. The market is tight right now, but it's possible it will open up before too long as interest rates drop.
Bottom line
Even with the recent cut, interest rates are still high. Skelhorn makes the case for where and where not to put your money. “The worst place you can keep extra cash, besides under your mattress, is in a checking account where it is likely earning less than 0.1% APY. Since the FDIC insures high-yield savings accounts, you are missing out on risk-free (up to FDIC limits) interest on your money by leaving it in a checking account or physical cash.”
The best place to put your money as interest rates start to decline is a personal choice. That said, it’s best not to make a dramatic move based on Fed rate cuts alone. Investing in real estate, upping your contribution into a retirement account, starting an emergency fund, moving your money into a money market account, or using a no-penalty CD are all good moves, even if the Fed cuts rates further.
