Economists expect the fed to cut interest rates again this week, only a month after cutting rates for the first time in over 4 years. What does this mean? Well, outside of any effects a rate cut may have on the stock market, it means the interest rates banks pay their customers may fall as well.
How can decreasing interest rates affect consumers? For the last year or so, it has been easy to find high interest bank accounts that pay about 5% interest. However, following last month’s rate cuts, interest rates around 4.5% are more common. If the rates are cut again, it is possible that interest rates will drop once more.
Lock in current interest rates. It you plan on keeping cash as part of your investment portfolio, now may be a good time to consider a CD ladder. Why? Because a CD ladder will allow you to lock in favorable interest rates for a set period of time.
Last week, my wife and I built a 5 year CD ladder and locked in our CDs at rates between 4.91-5.06%. For us, these rates are good enough that we will be happy with the returns for the next few years regardless of what happens with the rates. In fact, we built our CD ladder just before the possibility of further rate cuts was announced.
For those of you who are curious, here is a chart showing the Historical Federal Reserve Rates. (Note, the most recent drop in rates has not yet been updated).
Are CDs right for you? As with all investment decisions, that is up to you. My wife and I have a sufficient emergency fund and do not have a pressing need for the money we put into our CDs. The money we invested in our CD ladder is for an intermediate length of time (actually an unknown length of time), so we do not wish to expose it to the volatility of the stock markets. Please do further research and base your investment decisions on your personal needs and risk tolerance.Read How to build a CD Ladder.