Question: I have $50,000 saved. Where should I park it before a rate cut happens?
Answer: You'll want to find a savings solution that's resistant to rate cuts. That way, you maximize your savings while rates are still higher. However, you don't have much time to act.
The Federal Reserve's wait-and-see policy might change soon. The Fed meets this week with the anticipation that it'll cut the federal funds rate by 25 basis points.
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With this in mind, here's a look at why the Fed might soon change policy and one strategy I recommend for maximizing your returns.
The labor market's slow growth might prompt Fed's change
During his speech at the Jackson Hole Economic Symposium, Federal Reserve Chair Jerome Powell indicated that the Fed might be adjusting its stance after refraining from cutting rates at each of its meetings this year.
The reason for the change? Powell remarked, "The labor market remains near maximum employment, and inflation, though still somewhat elevated, has come down a great deal from its post-pandemic highs. He added, "The balance of risks appears to be shifting," which might change policy.
The reason for the potential change in approach concerns the labor market. The August jobs report demonstrates the labor market might be slowing faster than economists expected, per the Kiplinger Jobs Outlook. And one way to boost job growth is to cut rates, as it makes borrowing less expensive for companies looking to expand.
So, if you have a small nest egg saved that you want to grow, here's a savings solution that protects it from rate cuts.
Now is the time to maximize returns before CD rates drop
While cutting rates is favorable for businesses and those needing loans, savers take a hit when this happens. And one route to turn to now that'll protect your money from rate cuts is CDs.
A certificate of deposit features a fixed interest rate. Once you lock in your CD rate, it remains in effect throughout your term. The Fed could cut rates multiple times during your term and it wouldn't impact your savings at all.
Using this tool, powered by Bankrate, can help you find options that work best for your needs:
And if you are sitting on a wad of cash, I'll show you how a balanced savings approach can maximize yields now while gaining flexibility back to some of your money for future investments.
A strategy that keeps you ahead of the game, with flexibility
One strategy is to open multiple CDs at various terms. Doing so now ensures you lock in higher CD rates to maximize returns. But, it also achieves another positive: You'll gain quick access to some of your money.
Here's how it works:
- Put $25,000 in a one-year CD. A top-performing account is NexBank. You'll earn 4.30% with a minimum deposit of $25,000. In that year alone, you'll earn $1,075 effortlessly.
- Deposit $20,000 into a five-year CD. Our top pick is Lafayette Federal Credit Union, with a rate of 4.28%. Over five years, that'll earn you $4,662.39.
- Lastly, place your remaining $5,000 into a no-penalty CD. Climate First Bank offers 4.34% for six months. This will net you $107.35 in interest earned for a mere six months.
Overall, this approach helps you earn $5,844.74 for a few minutes of work setting up the accounts. Best of all, you'll only tie up half of your money for the next five years. The rest you'll have back within the year, and you can reconsider investment or savings options, depending on how the market does.
What I would caution with this approach
CDs are not a flexible savings vehicle for the most part. Term-based CDs require you to keep the money saved until maturity, or face significant withdrawal fees. For shorter-term CDs of a year or under, this could equate to a few months of interest earned.
Meanwhile, long-term CDs of five years could face penalties of up to one year of interest earned. Therefore, only take this approach if you're comfortable setting aside $25,000 for the next five years.
But you must act soon. It's clear the winds of change are coming, and the labor market isn't improving. Therefore, if you want a risk-free savings option resistant to rate cuts, this approach helps you maximize returns now, while rates are higher.
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