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The Federal Reserve cut the federal funds rate in mid-September for the first time in over four years. The 0.5% rate reduction was larger than some expected and could have a rippling effect on many of your financial accounts—especially if rates continue to decrease further this year.
You might be able to take action now to lock in higher rates on your savings, and make plans for minimizing how much interest you'll pay on debts in the future.
Here are steps you can take now as rates begin to decline.
Consider Opening a Certificate of Deposit (CD)
Banks usually offer certificates of deposit (CDs), a type of savings account, with fixed interest rates that are slightly higher than the federal funds rate. If you open a CD soon, you might be able to lock in a higher rate.
The potential downside is that you'll pay an early withdrawal penalty if you need the money before the CD matures. There may also be minimum deposit requirements for some CDs. But CDs could still be a good fit for short- to medium-term savings.
Consider how much of your savings you feel comfortable locking up and compare annual percentage yields (APYs) from different banks to see which CD might be best.
Find High-Yield CDs
Look Into Government Treasuries
Similar to opening a CD, you might be able to lock in a relatively high APY by buying treasuries—treasury bills, bonds and notes. These low-risk investments are loans to the federal government, and you'll get repaid with interest over four weeks to 30 years, depending on how you invest.
You might get a higher APY on a short-term bill than a longer-term bond or note. But even if you can't lock in the rate for long, it can be a good way to take advantage of higher rates before potentially more rate cuts. You could even set up a bond ladder by investing in treasuries with different maturity dates to give yourself regular access to part of your investment.
Compare High-Yield Savings Accounts
Banks adjust the APY on their savings accounts based, in part, on the federal funds rate. A rate cut could quickly lead to a lower APY, decreasing how much interest you earn. However, banks also consider other factors when setting rates, which is why accounts at different banks have different APYs.
Regardless of the federal funds rate, high-yield savings accounts tend to offer a higher APY than traditional accounts. You might find these from online-only financial institutions, which have less overhead and can pass on some of the savings to customers in the form of higher interest rates.
It's generally easy to open a new account and transfer your savings. So, compare APYs to see if you'll earn more interest by switching bank accounts today, and continue monitoring APY offers after the rate cut.
Moving your bill payments and direct deposits to a new bank can take more time. However, one approach is to maintain a checking account for day-to-day finances at whatever bank or credit union makes the most sense for you. Then, move your savings to the high-yield savings account that offers the best APY, and link your accounts to quickly move money between the two.
Other Ways to Prepare Your Finances for Falling Interest Rates
Lower rates also present an opportunity to save money if you're paying off debt. Rate cuts typically lead to lower interest rates on credit cards and other accounts with variable interest rates. You could put that extra savings toward paying down your debt faster, or set it aside in a high-yield savings account.
Lower rates won't affect accounts with fixed interest rates, but you can still prepare and respond to rate cuts in several ways:
- Review your debt payoff plan. Some debt payoff strategies involve prioritizing debts based on their interest rates. You could proactively review your plan assuming that variable-rate accounts will have a lower interest rate. Or, hold off and review your accounts after the rate cuts to make sure your plan still makes sense.
- Monitor mortgage rates. The rate cut might lead to a drop in mortgage rates. If you're considering buying a home, recalculate how much you can afford based on lower rates. If you already have a mortgage, see if you might be able to save money by refinancing.
- Prepare to consolidate debt. Some people use a personal loan to pay off and consolidate other debts, and rate cuts could lead to lower personal loan rates. Figure out how much you'd need to borrow and how low your personal loan's rate would need to be for consolidation to be a good idea.
Even if the federal funds rate continues to drop, interest rates will still likely be higher than they were a few years ago, and refinancing older debts might not make sense. But you could still look into other ways to save, such as using a balance transfer credit card that offers an introductory 0% APR.
Learn more >> How to Get Out of Debt
Improve Your Credit to Take Advantage of Lower Rates
A rate cut typically lowers the interest rate you'll receive on a loan or credit card, but lenders also set your rates based on your creditworthiness. Having an excellent credit score can help you qualify for the best possible rate, which can make paying off debt easier. Check your FICO® Score☉ for free to see where you're at and learn how to improve your credit.