How to Make the Most of Your Cash After Interest Rate Cut: 4 Tips

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• The Fed cut interest rates in its September meeting, which is the first cut in years.
• Experts say not to rush to action with your cash savings — but start doing some research.
• Start by looking at online banks, CDs, and treasuries.

Interest rates have been a relatively sore subject with consumers over the last few years, especially with the Federal Reserve increasing the federal funds rate a total of 11 times throughout 2022 and 2023. But, the Fed finally cut interest rates by 50 basis points at its meeting on September 18 — the first rate cut since March 2020.

This is excellent news for consumers planning to finance a home or buy a car, but the opposite is true for individuals flush with cash. Cuts to the federal funds rate impact interest rates across a broad selection of financial products outside loans, including rates that apply to savings accounts and certificates of deposit.

With interest rates dropping, what can consumers do now?

1. Avoid drastic moves and changes

Millennial finance expert Robert Farrington of The College Investor says consumers should remember that savings accounts are only meant to hold funds for the short term. Even though savings rates have been returning more than 5% over the last year, for example, the S&P 500 is up around three times that amount for the year right now.

“So, if you left too much in savings, you really were hurting your returns,” he said.

With that framework in mind, you should simply continue to keep your savings ready — especially when it comes to your emergency fund. Most experts recommend keeping three to six months of expenses in this fund in case of a job loss, loss in income, a change in your health, or another emergency situation.

2. Look into online banks

CPA Paul Miller of Miller & Company LLP says that consumers who want to keep their funds in savings for easy access don’t necessarily have to stick with the bank they have. With potential rate drops imminent, consumers should consider moving funds into high-yield savings accounts offered by some online banks, he said.

The best high-yield savings accounts offer considerably higher rates than traditional banks and credit unions. This is true now, but it will be just as true if the Fed continues to drop the federal funds rate in the future.

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3. Consider CDs

Financial advisor Andrew Crowell of DA Davidson says that, for cash reserves which need to remain safe and fairly liquid, savers should lock in interest rates now before they drop. Depending on a consumer’s needs, they can lock in their cash reserves with “laddered” certificates of deposit that last for 3 months, 6 months, 9 months, a year, and whatever other increments they prefer.

The downside of CDs is the fact that cash is locked up for the duration of the CD term, and that accessing it early typically requires a prepayment penalty (unless you’re using a no-penalty CD). However, laddering CDs with multiple maturity dates can help consumers keep some of their funds liquid at all times.

4. Consider buying treasuries

Financial expert Joseph DiSanto of investment website Play Louder says consumers can consider investing in treasuries that last from two years to 20 years but can be sold in the secondary market after you buy them. DiSanto explains that, when interest rates go down, the value of these notes increases and you can earn interest and sell the note for a profit on the secondary market. However, interest rate increases could lead to having to sell the note on the secondary market at a loss.

If you can keep treasuries for their full maturity, however, secondary market prices won’t matter to you.

“If you don’t sell in the secondary market and just hold the bond or note to maturity, you collect the interest rate that you initially signed up for,” he said.