The Fed rate cut scared me. Where should I invest my $127,000 in savings now?

By Beth Pinsker

This reader wonders whether CD rates, high-yield savings accounts and bond ladders are still smart moves, even if interest rates keep dropping

Got a question about investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money? You can write to me at beth.pinsker@marketwatch.com. Please put "Fix My Portfolio" in the subject line.

Dear Fix My Portfolio,

I have $127,000 in savings in a bank and it's earning less than 1%. I feel like the change in rates is my wake-up call. Where should I move it?

Saw the Light

Dear Light,

I'm glad something broke through your inertia. Big banks bet that even if they offer less than 1% in an environment where you can get 5% elsewhere, you'll stay put. Most of the time, they're right, which is how big banks stay big.

But with interest rates dropping now - the Federal Reserve dropped its key rate by half a percentage point and may drop it more by the end of the year - people like you are finally hearing the message that they need to do something different.

The question is: What is best to do? The answer will be a little bit different for everyone, because it depends on how much cash you have on hand and what the rest of your financial picture looks like.

First moves

In your case, some of the answers are easy. There's no reason to have $127,000 in an account that's earning virtually zero interest.

"If I see that in a client's account, it's automatically moving into high-yield savings," said Raman Singh, a financial adviser based in Phoenix. "Maybe they'll keep $10,000 in a checking account to have it readily available for bills."

In today's digital-banking universe, you can easily connect all your accounts and transfer money with a few clicks. So there's absolutely no reason you would not simply immediately transfer the bulk of your cash into a savings account at another institution that you connect to your checking account, and then think more deeply about your strategy while you earn a few extra bucks. Search online at an aggregator like Bankrate or DepositAccounts, or ask your local credit union. You might not earn 5% interest anymore, but 4.5% or even 4% is not nothing. If you put $120,000 into an account at 4%, that's about $400 a month.

The key reason to move your money - and fast - is that you're trying to outpace inflation with your savings. If core inflation is now 2.6%, roughly, the money you in the bank now is not keeping up with it, and you are losing purchasing power. At 4%, however, you're beating inflation. Your money will still be safe in a high-yield savings account - it's FDIC-insured against bank failure and your principal is guaranteed - so why wouldn't you want more of it?

If interest rates drop further - and they likely will - that will be because the Federal Reserve thinks inflation is waning more. So even if you end up earning 3%, which many banking experts say is the sweet spot where banks like to keep their rates, you'd still be beating inflation.

Look to the future

Don't stop there, though. You have a lot in cash, maybe more than you need. Financial adviser Ryan Zabrowski said the first thing he'd ask a client in your position is: Why do you have that amount in cash?

Are you buying a house in the next six months? Paying college tuition bills for triplets? Did you just get an inheritance? Did you win the lottery? All of these things could lead you to temporarily have a big stash of cash in the bank, and many people don't know where to go from there.

More often than not, however, when Zabrowski sees cash like that sitting idle, he smells fear.

These are people who have saved well and are so afraid of losing that money that they are stuck.

"If the answer is fear, that's OK," he said. "Are they going to always be afraid? If yes, that's OK too."

In that situation, you don't want to push too far ahead and start thinking about index funds versus mutual funds. Still, you can do better than cash. Try a bond ladder, he suggested, or Treasurys that are backed by the U.S. government, which you can lock in for long time periods to guard against rates going even lower. CDs tend to lag behind other interest-rate shifts, so you may be able to find the best rates on those - but be mindful that picking a shorter term, like three months, for a CD will just leave you with more decisions to make soon. The key is to pick investments that guarantee a fixed return at a fixed maturity. "You can't put fear money in a fund," said Zabrowski, because even Treasury-bond funds can lose money.

If you're willing to push a little bit past the fear, then the world of investing opens up to you. What you pick will have to align with your goals for the money and your time horizon, which will be different depending on whether you're 25 or 75. You can keep it simple.

Singh suggested keeping about $30,000 as an emergency fund in high-yield savings, and then taking about 95% of the rest and putting it in the kind of fixed-income investments that Zabrowski outlined. That leaves 5% to test in equities, like buying a broad-market S&P 500 SPX index fund. You don't have to worry about market timing or the best way to jump in. Given that you're getting less than 1% now, just jump. Today's the day.

When you're ready to do more, you can start to shift that fixed-income portfolio into more equities. Singh said that if you're 35 years old and this money is for retirement, for example, you'd want to build a proper portfolio. Maybe that looks more like 70% equities and 30% fixed income.

"It's all about, what's the money for," he said. So if you're not spending that $127,000 today or tomorrow, then start to make some adjustments, because your interest rate is only going to get closer to zero where you have your money now.

You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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More Fix My Portfolio

We have $1 million in high-yield savings and CDs set aside to buy a house. Should we move our money if the Fed cuts rates? Should you share your pension payout with your spouse, even if it means less money?I had a CD with a 5.5% interest rate and the bank wants it back early. Now what?

-Beth Pinsker

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09-21-24 0556ET

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