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- I asked my financial planner whether I should withdraw money from my savings if interest rates fall.
- He told me there was no need to rush to withdraw the money, but it would be worth it to ask for a higher income.
- ETFs and mutual funds offer better long-term returns, and CDs are also good options.
Recently, I sat down to do a mid-year audit of my finances and realized that over 65% of my money was sitting straight in a high-yield savings account. I've had financial experts tell me in the past that leaving money in a savings account isn't the best strategy.
Instead, they say it's best to only keep 3-6 months' worth of expenses in there, and I don't feel ready to follow their advice, especially since the high-yield savings account I have with Ally Bank is paying 4%-5% annual interest on the money in the account.
The Federal Open Market Committee is scheduled to meet at the end of July to assess the current economic situation. The committee may decide to cut interest rates, which will affect savings accounts, loans, and mortgages.
If that's the case, it might be wise to move some money out of a high-yield savings account. I met with certified financial planner Jake Skelhorn, who shared three things you could do with that cash if interest rates fall.
1. There is no need to rush to withdraw your money
I told Skelhorn that I felt more comfortable having enough cash in a high-yield savings account: As a self-employed person with a fluctuating income, I wanted more than the traditional three to six months' worth of expenses in that account.
He said there's no need to rush to withdraw money from that account, even if interest rates start to fall.
“If the primary purpose of the funds in a high-yield savings account is to have easy access for emergencies or short-term expenses like a vacation or a down payment, then there's no harm in leaving the money there,” he said. “The high interest rate is a risk-free bonus. If the interest rate were to fall, it wouldn't affect the overall purpose of the funds.”
2. Reassess your liquidity needs
But Skelhorn said that if I do If you want to move some of your money around so that your high-yield savings account balance isn't significantly higher than what you need for your emergency fund, it might be time to invest your excess cash.
“Getting a guaranteed return of around 5% from a high-yield savings account is nice, but investing in the stock market through ETFs or mutual funds typically provides better long-term rates of return for goals like retirement,” he said. “While there is a lot of volatility from year to year, stock market returns have averaged around 10%, which is roughly double what you can currently get in a high-yield savings account.”
3. Consider similar low-risk alternatives
I told Skelhorn that I would be investing some of my cash in a high-yield savings account, but that I wanted to put the remaining large sum of money somewhere in the low- or medium-risk space.
He said that if you plan to use some or all of the money in a high-yield savings account for a specific expense at a predetermined date in the future, it's a good idea to consider CDs or Treasury bonds to lock in a higher interest rate with lower risk.
“For example, if you know you're not planning on buying a home for at least a year, you can buy a one-year CD and know you'll get that interest rate no matter what,” he said.
After speaking with Skelhorn, I decided to stick with a strategy that works for me: I'll put six to nine months' worth of living expenses into a high-yield savings account no matter how low interest rates go, invest some of what's left, and put the rest into CDs for now.
