Those sky-high interest rates that have benefitted savers will likely decline over the next year, starting sooner than you may realize. The Fed is expected to cut interest rates at its meeting this week. Experts were anticipating a rate cut between .25% and .50%, but the "mixed August CPI report" has lowered expectations, with most predicting a cut of by 25 basis points or .25%, according to Kiplinger investing expert Dan Burrows. Any cut to the Fed rate will reverberate through the financial markets and impact the rates consumers pay on debt and earn on their savings.
On the bright side, debt tied to variable interest rates should become cheaper to service and payoff, such as credit cards, adjustable-rate mortgages or home equity lines of credit (HELOCs) and some private student loans. The downside is that once the Fed reduces rates, we will likely see a dip in the highest savings rates.
Now is the time to make decisions about your short-term savings goals and where to grow your money. Remember that the longer you wait, the lower the available savings rates will likely be.
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Here is where you should consider parking your cash before the lower rates take effect:
Certificates of deposit (CDs)
When you invest in a CD while rates are high, you'll keep your higher rate regardless of nationally falling rates. This feature makes CDs the best way to lock in the 5% savings rates CDs have been paying since the Fed rate started climbing in 2022.
It's taken several years for rates to reach these heights. The average three-month CD APY in January 2020 was 1.65%. A COVID-induced recession triggered the Fed to cut rates to nearly 0% in March 2020. By June 2021, the average three-month CD rates had reached a low of 0.09%. In 2022, the Fed began raising rates to manage inflation and head off a recession. The last rate hike was in July 2023 and the higher Fed rates resulted in average 3-month CD rates of 5% or more.
CDs are an effective, reliable way to earn guaranteed returns of over 4%. Many banks offer 5-year CDs with rates exceeding 4%, and some 1-year CDs offer rates well above 5%. Read Four CDs to Check Out Before a Fed Rate Cut to get recommendations from Kiplinger's savings expert, Erin Bendig.
The biggest potential drawback is the penalties you might incur if you cash in your CD prior to maturity. If you are apprehensive about locking up your money, you can buy a no-penalty CD and avoid angst and fees. These CDs usually pay slightly lower rates to offset the bank's risk of early redemption. Otherwise, this FDIC-insured savings opportunity is the best place to park your cash as rates come down.
Money market accounts
Money market accounts combine the best features of savings and checking accounts. You earn a higher rate than a traditional savings account but retain access to the funds with check-writing privileges and/or debit cards. The interest rate on these accounts is variable and can go down after you open the account.
Accessibility to your funds is why I highly recommend these types of accounts to hold your emergency funds. You can easily pay your mortgage, car insurance or medical bills if a financial emergency arises.
Watch out for the minimum balance requirements that are common for money market accounts. Many accounts have minimum balance requirements to open an account and a minimum closing daily balance. To avoid these fees, crunch the numbers, and if you are on track to drain your emergency fund, close the account and cut your losses before the fees accumulate.
High-yield savings accounts
All savings accounts earn interest. The amount of interest depends on which account you choose. A traditional savings account averages only a 0.61% annual percentage yield (APY). In comparison, the APYs on top high-yield savings accounts are 5% and above, according to Bankrate.com. That's why I recommend high-yield savings accounts for everyone regardless of the Fed rate; even when rates fall, a high-yield account will still be one of the best and safest places for your savings.
The two most significant downsides of high-yield accounts are monthly fees and variable interest rates, but there are ways to mitigate those drawbacks. We can recommend at least 10 no-fee high-yield accounts that are currently paying over 5%. Whether overall rates increase or decrease, high-yield savings accounts with the best yields tend to outperform their competition consistently. Monitor the rate your account is paying and if you notice that your savings account is falling faster than others, consider shopping around for a better account.
If you need more encouragement to open a high-yield account, read Is It Worth Getting a High-Yield Savings Account Before the Next Fed Meeting?
Bottom line for savers as we anticipate lower APYs
If CDs, high-yield accounts or money market accounts fit into your short-term savings goals, this is a good time to get them. The longer you wait, the lower rates will likely get.
Lower interest rates can make saving less appealing and borrowing more affordable. Depending on how low rates go, you should consider paying off your high-interest debt, and you will be "saving" by reducing your debt load and lowering your monthly outlays for debt service. That would free up more income that you can use to save for a down payment on a home, college tuition or your retirement.
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