In September, the Federal Reserve Open Market Committee delivered a long-anticipated cut to the federal funds rate. The benchmark interest rate is now in the range of 4%-4.25%. The board also signalled further rate cuts ahead, and the market now expects the rate to drop as low as 3.25%-3.50% by 2026, according to Morningstar. [1]
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Simply put, we’ve entered an easing cycle which should benefit borrowers across the country. But if you’re a saver or lender, these rate cuts mark the end of an exceptionally lucrative era. If you’re a retiree or someone living off passive income, it may no longer be easy to generate high returns.
However, the simple truth is that you should probably keep cash in the same places you should have kept them before. Your emergency fund and other savings that you want easy access to should always be kept in safe, low-risk, liquid assets. Money that you won’t need in the short-term can go towards long-term investments that earn higher returns, like stocks.
If you haven’t been optimizing your savings based on your needs, there are a wealth of options beyond simple savings accounts worth investigating for higher rates.
As of October 2, it’s still possible to get a 5% yield on a high-yield savings account at some online banks like AdelFi and Varo. This is an attractive yield for any cash you need to park temporarily, but the rate could decline if the Fed continues to cut rates.
If you’re looking for attractive interest rates for your cash savings, here are some other assets you should consider.
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Unlike a traditional savings account, a certificate of deposit (CD) is designed to freeze the rate you can earn as long as you’re also willing to freeze your cash.
As of October 2, the highest CD rate available is 4.45% from LendingClub. This is for an eight-month term, which means you can ride out a few rate cuts while earning a healthy return on your cash.
You can also lock-in a similar rate for a much longer term. The highest available 1-year and 2-year CD rates are a little over 4%. If you expect aggressive rate cuts in the next two years and want to preserve your purchasing power, these could be an ideal option.
Buying a treasury is simply like lending money to the U.S. government at today’s market rates and getting your money back with interest. They are backed by the full faith and credit of the U.S. government, which makes them extremely safe.
Treasury bills or T-bills are government debt securities that mature anywhere from four weeks to a year. One major benefit here is you don’t have to pay state or local taxes on interest.
The current yield on T-bills is around 4%.
If you’re looking for a place to park cash temporarily, a money market fund might be a good option. These are mutual funds that spread your cash across a range of short-term, low-risk bonds, ranging from Treasury bills to municipal bonds and commercial paper.
The Vanguard Federal Money Market Fund (VMFXX) is a popular option and it offers a 4.07% 7-day SEC yield as of October 2. To be clear, this is a variable rate so if interest rates drop in the near-term your yield will decline too.
But if you’re looking for quick-access, high liquidity and low-risk, this is a way to earn some yield instead of keeping your cash in a checking account earning low interest.
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