On July 30 the Federal Reserve chose to keep short-term interest rates steady.
That’s bad news for borrowers, who will have to wait at least a little longer for costs on everything from credit cards to car loans to come down — market watchers now expect the Fed to cut rates in September.
But what if you’re looking to save money rather than borrow it? The Fed’s rate also impacts how much interest you earn on cash and short-term bonds. If you’re looking to stash away cash, you’d be smart to act before the Fed moves rates down, says Greg McBride, chief financial analyst at Bankrate.
“If you want an interest rate that starts with a four, you’re going to have to act quick,” he says. “Because that door is starting to close.”
Who should lock in a rate now
If you’re stashing away cash for a short- to intermediate-term goal — say, five years or less — the first thing to ask yourself is when you are going to need the money.
If you’re putting money into emergency savings or just aren’t sure when you might need it, your first priority is being able to access the money freely, says McBride.
“You’d want to keep the money in something completely liquid, like a high-yield savings account,” he says. Here are a couple of options.
High-yield savings accounts
You can currently earn an annual percentage rate as high as 4.35% on a HYSA at online banks, according to Bankrate.
The problem with these, though, is that rates are subject to change, says McBride. Should the Fed lower rates in the fall, he says, the rate you get on a high-yield savings account is likely to come down with it.
Certificates of deposit
If you have a more defined timeline for when you need the money, consider taking advantage of a certificate of deposit. These savings vehicles offer a fixed interest rate over a set period of time, such as six months, one year or two years.
Typically, longer-dated CDs offer higher rates than shorter term ones, and overall, CDs tend to offer more attractive rates than HYSAs. You can currently buy a 10-month CD with an APR of 4.5%, according to Bankrate.
The tradeoff for the boost in yield is that you’re generally required to leave your money in a CD for the duration of the fixed term. Take your money out early, and you’ll generally owe the equivalent of several months’ worth of interest in fees.
Treasurys
Another option for short-term savers: bonds — debt issued by governments or corporations that investors can buy in exchange for a fixed interest rate over a set term. Similar to a CD, you can buy a bond with a set maturity date that lines up with when you’ll need the money.
Put your money into a 3-year Treasury — a U.S. government-backed bond that comes with virtually no risk of defaulting — and in three years you’ll get your money back, plus whatever interest rate you locked in when you bought it. That makes these an appropriate pick for people looking to lock in a rate before the Fed turns the dial down, says McBride.
When weighing whether a Treasury or a CD might be a better bet, do a little back-of-the-napkin math, he says.
“Treasuries are exempt from state and local taxes, whereas income on CDs is generally taxable at those levels,” he says. “The top-yielding CDs beat treasuries by a fairly healthy margin, but the state and local tax exemption could tilt the scales depending on where you live.”
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