If the Fed Cuts Rates Next Month, I Won't Change a Thing

Inflation is finally starting to cool. In response, the Federal Reserve cut the federal funds rate by 0.50% on Sept. 18, 2024. It was the first rate cut in four years, but it's expected to be just one of many we'll see over the coming months. Some expect another rate cut as soon as November 7.

It's disappointing news for savers who've been enjoying rates as high as 5.00% on savings accounts and CDs for over a year now. These have already started to come down with more drops on the way. But even if we do see another rate cut in November, I'm keeping my savings right where it is.

Interest rates are important, but they're not the only thing that matters

I keep my savings in a Discover® Online Savings account, where I earn a 3.75% APY on my cash right now. This yield is well above the national average of 0.42% APY, and it's helped me earn quite a bit in interest over the last few months. I know that rate will go down further as rate cuts continue, but it's still the right home for my money right now -- and it could be for yours, too.

The account doesn't charge a monthly maintenance fee, and it lets me earn interest on all my cash with no minimum balance. But most importantly, it gives me access to my cash whenever I need it. For me, that liquidity is worth having an interest rate that fluctuates over time. If that matters to you too, consider opening a Discover® Online Savings account for yourself.

I use it to house my emergency savings and cash I plan to spend within the next few years. I don't want to invest my emergency fund or even lock it away in a certificate of deposit (CD) because I never know when I'll need to use it. I'd rather not deal with early withdrawal penalties for tapping my CD before the term ends or selling my investments at a loss, so I plan to stick with my savings account to house these funds.

My long-term savings are invested in my retirement accounts and a taxable brokerage account. These aren't affected by the Fed rate cut in the same way as bank accounts are, so I'm not tempted to make any big changes to these funds at the moment either.

There's still a way to lock in high bank account rates

Just because I'm comfortable leaving my money where it is doesn't mean you have to be. If you want to hold on to high interest rates for a while longer, a CD could be the right choice for you. LendingClub CDs still offer interest rates up to 4.00%. That could earn you about $237 over its 6-month term if you have a $10,000 initial deposit.

But it's important to look beyond just the APY. Right now, short-term CDs still offer the highest rates -- this isn't typical. As rates begin to drop, we're going to see a return to longer-term CDs offering higher rates. While it might be tempting to lock in the highest possible rate now, you could earn more by opting for a longer-term CD with a slightly lower rate.

For example, the rate on the 1-year LendingClub CD is just 4.00%. But you could earn $410 in interest -- roughly $173 more than you'd get with the 6-month CD -- with a $10,000 initial deposit.

You also have to consider how comfortable you are locking your money away. If you expect to spend that money in the next couple of years, a 5-year CD isn't a great choice because you'll probably have to pay an early withdrawal penalty to access your cash. So you have to balance this when selecting your CD term.

Also, keep in mind that you can usually earn much more over the long term by investing your cash in the stock market. There's a risk of loss associated with investing, but there's also a better possibility of significantly increasing your wealth over time.