With the Fed rate cut, have I missed the boat on 5% CDs? I was too late to invest in the housing market.

By Quentin Fottrell

The U.S. Federal Reserve cut the benchmark rate on Wednesday by 50 basis points

Dear Quentin,

It's the story of my life.

I finally have $50,000, partly a gift and partly an inheritance, and it's the most money I've ever had in my bank account. I feel like I missed the boat in life. Where should I invest my money, assuming that I won't be able to buy a home for several years?

I am 33 and work as a special-ed teacher. Now I'm completely priced out of the market. My mom said I should invest in a CD. Have I missed the boat on these too? I missed the boat on the housing market because when prices were more affordable, I had no money for a down payment.

Standing on the Dock

Related: We're 58, earn $160,000 and saved $2.2 million. We grew up poor. Our families treat us like ATMs. Are we OK?

Dear Standing,

Standing on the dock is not so bad. You could be in the water.

Your $50,000 may not have come in time to get a house in your area, but you still have time to invest in certificates of deposit and earn a very healthy rate - more than inflation, which was recently running at 2.9% in July, down from 3% in June. So you're winning.

Certificates of deposit are investment vehicles with set interest rates that attract people looking for a safe haven for their cash in an uncertain economic climate. CD rates typically track the federal-funds rate; Wednesday's rate cut brings it to a range of 4.75% to 5%.

Some regional credit unions are offering rates of 9%. They are special offers mainly to attract new customers. You typically must sign up for membership and live in that state; plus, there are limits on the amount of money you can invest in such CDs. They are a mirage for most people.

In September, you still can get rates at around 5%. That's not bad, considering that during a period of heady inflation last year, you could get a CD rate of 6%. CD ladders allow you to buy one-, two-, three-, four- and five-year CDs, so that you have one maturing every year.

The Federal Reserve made its biggest cut to the benchmark rate in 16 years on Wednesday, reducing the benchmark rate by 50 basis points. The first rate cut in 4 years. A decreasing interest-rate environment should, eventually, help change the landscape for stocks and, hopefully, real estate.

Right now, inflation is still relatively high, but it's come down from a peak in 2022 and the labor market is showing signs of weakness. But it's still a good time for cash.

With inflation still above the Fed's target, unemployment is edging above what it believes is consistent with full employment, he added. "Right now, you have risks to both employment and inflation, and you can always reverse course if it turns out that one of those risks is developing."

That won't, in all likelihood impact CD rates immediately, but given that we appear to have reached the peak in the latest interest-rate cycle, it's probably not a bad idea to lock into a five-year CD before rates gradually, and inevitably, begin their decline.

CD rates started climbing in 2022, but the highest CD rates have hovered at around 5% since the start of the year. As we've seen with headline-grabbing special offers that come with many restrictions, there is competition between financial institutions for CDs.

As we've seen with headline-grabbing special offers that come with many restrictions, there is competition between financial institutions for CDs.

One advantage of investing in CDs is that, given you are looking for a house in the medium term, at least, it will keep your money pretty liquid - in other words, you will be able to access it easily enough without incurring any hefty penalties.

Your mother is correct. The same is true for high-yield savings accounts. The best rates currently hover just below and/or around 5%. Unlike most CDs, you can make deposits at any time, but there may be a limit on how many withdrawals you can make within any given period.

Right now, inflation is still relatively high, but the labor market is showing signs of weakness. And even though prices are high, economists remain divided over the prospect of an imminent recession. What does that mean for you? It's still a good time for cash.

I assume you have a 401(k) at work. If so, make sure you are contributing the maximum amount. It's easy when you're in your 30s to worry about getting your foot on the property market at the expense of thinking about your retirement. Blink, and your retirement will be here.

You will find dozens of S&P 500 stocks that analysts currently rate a "strong buy," but they won't give you the most valuable hedge against current and future stock-market volatility: diversification. You will be glad of that when economists start talking about a downturn.

It's easy when you're in your 30s to worry about getting your foot on the property market at the expense of thinking about your retirement. Blink, and it will be here.

First off, pay off any high-interest-rate debt you have and, if you don't have an emergency fund, put some extra cash aside for that. You lose money by carrying debt: The average interest rate for a personal loan is 12%, and the average credit-card APR is closer to 23%.

Look at mutual funds, exchange-traded funds and shorter-duration bonds with a maturity of less than five years; Treasury inflation-protected securities (TIPS), which are inflation-protected bonds issued by the U.S. Treasury; and, here's that word again, diversification.

Health savings accounts (HSAs) allow you to save money in a tax-advantaged account and withdraw it tax-free for qualified medical expenses. You can also use that cash to reduce your out-of-pocket medical expenses in retirement.

HSAs are, essentially, one way to build a "medical nest egg," depending on how much you use during your working life. For 2024, individuals under a high-deductible health plan have an HSA annual contribution limit of $4,150. The HSA contribution limit for family coverage is $8,300.

My goal here is to offer you hope and clarity - hope that you will be able to achieve your dream of buying a home eventually, and clarity on the often unnecessarily complicated world of finance. When it comes to saving for a house or your retirement, it's a long game.

When you buy a ticket on that dock, take the slow boat.

Related: I moved $700K to CDs and a safe-deposit box for my kids. Does my estranged wife have a right to these assets?

The Moneyist regrets he cannot respond to letters individually.

More columns from Quentin Fottrell:

'At times, the pain is unbearable': My daughter cut me out of her life. I'm conflicted - do I exclude her from my will?

Our daughter and son-in-law spend money as fast as his parents give it to them. Should we intervene?

I'm a veteran, 53, with 6 degrees and $245,000 in student debt. I plan to discharge my loans due to my disability when I hit $1 million.

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-Quentin Fottrell

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09-19-24 0229ET

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