Where to invest your money when interest rates fall

After hitting a 23-year high, the Federal Open Market Committee (FOMC) cut interest rates by half a percentage point at its September meeting. It was the first rate cut since 2020 and raises the possibility of another rate cut before the end of the year. For consumers, the cut means an end to two and a half years of the highest interest rates in decades.

Yields on certificates of deposit (CDs), money market funds and high-yield savings accounts have already fallen since the Fed meeting. Given this development, you may be wondering where to invest your money. At least how you keep the money you have.

Stubbornly high cost of living

Although inflation has cooled significantly since the pandemic, concerns remain about rising costs in many areas of daily life. According to the latest quarterly report on household debt and credit, household debt increased by $109 billion to $17.80 trillion in the second quarter of 2024.

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Auto loans increased by $10 billion, mortgage balances rose by $77 billion and credit card balances increased by $27 billion to $1.14 trillion, with an average customer balance of nearly $6,500. Limits on home equity lines of credit (HELOCs) rose $3 billion, marking the ninth consecutive quarterly increase. The good news is that Fed cuts tend to make borrowing cheaper, although financing costs are still high.

Jake Skelhorn, CFP at Spark Wealth Advisors, says that despite the recent cut, interest rates are still at their highest in over 10 years. “For any planned expenses that are one to five years away—a down payment on a house, a wedding, or a trip—it might be a good idea to set an interest rate, such as on a CD, in case…” The Fed continues to cut interest rates, which is historically likely.”

Mortgages

The money you pay in rent every month is money you will never see again. However, buying a home and paying off the mortgage helps build equity. It is a valuable asset that increases in value over time and is a good place to invest your money.

Many home buyers have waited to purchase a home because of high interest rates. However, historically speaking, interest rates are still relatively low. In the 1970s, mortgage rates reached 12.9%. In the 1990s the average was around 8%. In the 2010s, rates ranged from 3.74% to just over 5%. Today, mortgage rates for a 30-year mortgage are around 6.3% (after fluctuating a bit following the Fed’s rate cut).

Alex Blackwood, CEO and co-founder of fractional real estate investing app Mogul Club, shares his thoughts: “The Federal Reserve’s interest rate cut will lead to more new entrants entering the real estate market. When interest rates fall, homeownership becomes more affordable and offers greater short-term value in the buyer’s market. With more cuts expected next year, some buyers will wait to purchase until further rate cuts occur. This presents a buying opportunity now.”

This also increases competition in the housing market, which leads to rising property values in the long term. “If the buyer waits too long, the market will turn into a seller’s market with bidding wars due to limited supply and increased demand,” adds Blackwood.

Derrick Barker, co-founder and CEO of Nectar, cautions potential homebuyers that timing the market is a bad idea. “My advice on timing the market is not to do it. Real estate is unique and some properties or locations are often unavailable. If you find a property that you really like and can afford, you should buy it.”

Loans

Even though the Fed recently cut interest rates, nothing will change if you have a fixed-rate loan. On the other hand, if you want to take out a new car loan or refinance your mortgage, lenders’ APRs will be lower. The rate cut will help a little now and more later as interest rates continue to fall by making it more affordable to borrow money. You’ll pay less interest and your monthly payments may be lower too.

savings

It’s likely that the annual percentage yield (APY), or interest you earn on your bank deposits, will decline due to the Fed’s interest rate cuts. You’ll earn less with short-term products like savings accounts and money market funds, but that doesn’t mean you’ll change your habits when it comes to building an emergency fund, even though you’ve become accustomed to returns of up to, and sometimes over, 5%.

The prices weren’t always this high. In the 1980s, savings rates rose to 8%, but deregulation led to bank failures as banks could not maintain these rates. In the 1990s, rates fell to 4 to 5%. However, savings rates fell even further in the 2000s to between 1% and 2% and remained there until the financial crisis of 2008, when interest rates fell to historic lows of below 0.25%.

Even if interest rates go down, you’ll still earn significant interest on your money, especially if you put your money in a high-yield savings account. Plus, you never know when you’ll need easy, fee-free access to your money.

You may be hesitant to put your hard-earned money into a risky stock market, but it usually pays off. Historically, the market’s average annual return has been around 10%. This alone makes long-term investing in stocks one of the best places to put your money and beat inflation over time.

Long-term CDs

If you don’t plan on using your money in the near future, consider moving it from a checking or regular savings account to a CD. Before prices drop, you can set your rate. Currently, many top earning accounts still offer APRs above 4% and 5%. Keep in mind that longer-term CDs typically earn higher interest rates than short-term CDs. If you’re not sure when you’ll need your money, consider opening multiple CDs with staggered due dates or CD ladder lists.

“Alternatives to high-interest savings accounts for planned expenses one to five years away should include CDs and Treasury bonds,” says Skelhorn. “They are less liquid but guarantee you an interest rate for a specific period of time, which is not the case with high-yield savings accounts.”

Treasury bill

Like CDs, Treasury bills and longer-term savings accounts are good choices if you’re looking for a place to keep your money in an account that pays higher interest rates. You can still get around 5% on several T-Bill terms, but these rates may only last for a while due to Fed rate cuts. Also keep in mind that even though tax rates may go down a bit, you won’t have to pay state or local income taxes.

Property

One place that can also generate income in lieu of Fed rate cuts is through rental real estate. According to Pew Research, you might be surprised to know that 72% of single-unit rental properties are owned by individuals. When you purchase and hold onto a rental property, you can benefit from recurring income and potential capital gains when you sell or refinance the property. The market is currently tight, but it is possible that it will open up soon if interest rates fall.

Conclusion

Despite the recent reduction, interest rates are still high. Skelhorn makes the case for where you should and shouldn’t invest your money. “The worst place to keep extra cash other than under your mattress is in a checking account, where it’s likely to earn less than 0.1% APR.” Because the FDIC insures high-yield savings accounts, you’re missing out on risk-free interest (until… to FDIC limits) for your money if you leave it in a checking account or physical cash.”

The best place to put your money when interest rates start to fall is a personal decision. However, it’s best not to make dramatic moves based solely on Fed rate cuts. Investing in real estate, increasing your contribution to a retirement account, setting up an emergency fund, moving your money into a money market account, or using a penalty-interest CD are all good moves, even if the Fed continues to cut interest rates.

Stubbornly high cost of living

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