3 Ways to Keep Earning 5% Returns After the Fed Cuts Rates

The Federal Reserve is almost certainly going to cut rates in September. For more than a year, we've seen some of the highest rates in decades. Now, with inflation coming under control and unemployment rising, it looks like the Fed will ease the brakes on the economy.

That's great news for borrowers, but less so for those who've been enjoying annual percentage yields (APYs) of 4% or 5% in their savings accounts and CDs and wanted the good times to continue forever. However, those accounts aren't the only way you can earn returns of 5% or more, particularly if you're able to put your brokerage account to work.

Here are three to explore.

1. Pay down credit card debt

If you carry a balance on your credit card, you could be paying 20% to 25% or more in interest. Fed rate cuts will likely mean those rates dip a little. But the annual percentage rate (APR) on your card will still be significantly higher than the APY you might earn through a savings account or even stock market investments.

Plus -- unlike stock market investments -- paying down your balance means a guaranteed return. If you told me about an investment that guaranteed an annual return of over 20%, I would think it was a scam. Yet paying down your credit card is anything but. In addition to the financial gains, reducing your balance can build financial stability and even help your credit score.

2. Invest in an index fund or ETF

There is a big difference between saving and investing. Saving is a low-risk choice for money you may need in the short to medium term, like your emergency fund or cash you're saving for a down payment on a house. When savings rates fall, you'll still need money in a savings account, even if it isn't earning a high APY. It's your cushion against the unexpected.

However, if you already have three to six months' worth of expenses in a savings account, it's time to put the rest of your money to work for you. One way is to buy exchange-traded funds (ETFs) or index funds.

These often carry low fees and can make it easy to build a diversified portfolio. For example, a fund that tracks the performance of the S&P 500 would give you exposure to the 500 biggest companies in the U.S.

Historically, the S&P 500 has generated average annual returns of about 8% -- more if you factor in reinvested dividends. Let's say you invested $500 a month into an S&P 500 ETF or index fund and managed to get an annual return of 8%. You could have almost $275,000 in 20 years' time. Earning 5% on that same investment would give you just under $200,000.

The big caveat for investing is that you need a long-term focus. There will be years when the stock market performs badly as well as ones when it does well. That's OK if you're thinking 10 or 20 years ahead because you can afford to wait out the downturns.

3. Invest in bonds

Bonds are essentially IOUs issued by companies, local authorities, or governments. In many cases, the borrower, or bond issuer, pays interest on the loan. This gives you, the bondholder, a fixed rate of return.

Things get a little more complicated because bond prices are not fixed. Just as stock prices change, bond prices fluctuate depending on economic and other factors.

Many investors use bonds to balance their portfolios and get tax advantages -- particularly as they get closer to retirement and want to reduce risk. The good thing about bonds is that when interest rates fall, bond prices tend to rise. That makes them a useful way to earn decent returns relatively safely once the Fed cuts rates.

Bond investing is not quite the same as buying stocks. For starters, the returns are usually lower (as is the risk). More importantly, if you're new to bonds, you'll need to take time to learn how to evaluate them just as you would any investment. You can buy bonds through an online broker, a bond ETF, or directly from the U.S. Treasury.

There are many ways to earn returns of 5% or more

The exciting thing about high savings rates is that you can earn inflation-beating APYs with barely any risk at all. Unfortunately, a lot of the time, higher returns come with increased risk. The trick is to understand and manage those risks.

For example, if you have a diversified portfolio, its value won't tank if a specific industry or asset class performs badly. And investing for the long term means you have time to ride out any short-term market fluctuations. Bonds can generate steady returns at a lower risk, but you need to understand how they work.

Ultimately, doing nothing is often the biggest risk of all. Once the Fed cuts rates, it's important to shop around to ensure you're getting the best possible APY on your emergency cash. Then work out how much money you want to leave in your savings and how much you can put to work elsewhere.