Boost Your Savings: Tips to Maximize Interest Earnings After the Fed's Rate Cut

The Federal Reserve dropped the federal funds rate for the second time this year, and additional cuts might be made in 2019.

Rate reductions might be a reason to rejoice, especially if you want to pay off debt or purchase a property. However, you should also anticipate receiving less interest on certain investments and bank deposits. To put it another way, now is a good moment to reconsider where you save and seek out strategies to increase your interest income.

When the Fed lowers its target rate, what happens?

Reductions in interest rates affect banking and borrowing in a number of ways. What to anticipate following a Fed rate cut is as follows:

Loans: Nothing will change if your loan has a set interest rate. However, lenders will offer reduced annual percentage rates (APRs) if you wish to refinance an existing loan or take out a new mortgage or auto loan, for example. Because you will pay less interest and possibly have lower monthly loan payments, borrowing money becomes more affordable.
Bank accounts: The interest you receive on bank deposits, or the annual percentage yield (APY), falls. The amount of money you keep in your savings and checking accounts will decrease as a result.
Low-risk investing: Your rate won’t change if you currently have an investment account that offers you guaranteed returns, such a Treasury bill or certificate of deposit (CD). On the other hand, new account rates will start to decline.

How to increase interest given lower rates

Your interest rates may only move slightly in the near future due to the Fed’s anticipated conservative rate drop. But since there will probably be more cutbacks in the future, this is a fantastic opportunity to lock in high rates and get ready for what comes next.

Select a bank account with a high interest rate

Because you need to have easy, penalty-free access to your money, it is ideal to put your emergency reserves and daily cash in a bank.

However, your holdings will earn less when banks lower the interest rates given on deposit accounts, which they have the right to do at any moment. Therefore, you should look at the annual percentage yield (APY) on your bank accounts and compare rates to see if you can get a better deal elsewhere. The following bank accounts could generate higher income than your typical savings or checking account:

Checking for high yield
High-yield savings
Online bank accounts
Credit union accounts
Mutual bank accounts

Now open a CD

Consider transferring funds from your savings account to a CD as soon as possible if you don’t intend to spend them in the coming months. You could lock in up to 4.5% APY or more by doing this before rates decline further.

The objective is to hold onto your high rate for as long as possible after any future rate reductions, so in addition to comparing rates, search for CD accounts with longer terms.

Those who have been saving for a down payment on a house may find this method very helpful. While you wait for mortgage rates to decline, you can lock in a high annual percentage yield (APY) by transferring your funds into a CD. You might also think about CD laddering, which is opening several CDs with different maturity dates, if you’re not entirely sure when you’ll need your money.

Set T-bill pricing in advance

Treasury bills, like CDs, are an excellent option if you want to lock in high rates before they start to decline and you’re saving for a future expense. You can still receive about 4.5% on a number of T-bill periods right now. These rates won’t last long, though, because of the Fed’s rate drop.

Examine the rates and terms of accessible CDs before purchasing a T-bill to determine where you can make the most money. Additionally, remember that T-bill revenues are exempt from state and local taxes.

Adjust your long-term investment portfolio

To retain or surpass the returns you have been receiving from bank deposits and fixed-income assets, you will need to take on more risk when interest rates decline. This implies that you might want to transfer the funds to your stock portfolio when your existing CDs, T-bills, and bonds mature.

Although rate reductions generally benefit the stock market, it is too soon to predict how it will react in the upcoming months. To put it another way, patience is needed. However, other analysts advise investing in companies that are more susceptible to rate decreases, such tiny caps and real estate investment trusts (REITs), while you wait to see how the market stabilizes.