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Is It Better to Save or Invest When Interest Rates Are High? Thumbnail

Is It Better to Save or Invest When Interest Rates Are High?

Leisl L. Langevin, CFP®, CDFA®
Senior Vice President & Financial Advisor 

Savers have been in the driver’s seat this year with interest rates on bank savings accounts and money market mutual funds fluctuating around 5%. While these short-term investments offer safety and liquidity, they do have some often overlooked risks. Interest rates on bank accounts and mutual funds can fall just as quickly as they can rise. So, investors with a long-term investing horizon may want to consider locking in today’s interest rates by purchasing longer-term bonds.  

In addition, returns on bank accounts and money market funds have historically lagged the historical, long-term returns stocks have generated. Over a period of years, that can have a major impact on portfolios.    

Let’s compare some of the pros and cons of investing in savings accounts and mutual funds versus longer-term investments.  

Great For Rainy Day Funds. 

Savings accounts and money market funds can be the perfect places to stash cash earmarked for an emergency or a large expense expected within the next few years. Both accounts are extremely liquid, with money typically available on demand or overnight. They’re also considered extremely safe, with most money market funds investing in short-term securities and most bank savings accounts insured by the FDIC for up to $250,000.  

When Floating Rates Sink.  

Money market mutual funds and bank savings accounts may not be the right investment vehicles for long-term investors, however. The interest rate they offer today is not guaranteed and can change rapidly.  

Short-term interest rates typically take their cue from the Federal Reserve. For example, in 2000 and 2001 during the Covid pandemic, the Federal Reserve lowered the Fed funds rate to practically zero to boost economic growth. The interest rates on money markets and bank accounts fell in lockstep – leaving savers in these instruments earning next to nothing.  

As the economy recovered and inflation rose, the Federal Reserve raised the Federal funds rate until it hit 5.3% in August. Interest rates on money markets and bank accounts rose in tandem and savers were happy once again.    

The Federal funds rate has remained at 5.3% since August, but most market forecasters expect the Federal Reserve will start to slowly lower interest rates once again. Interest rate cuts could start this year or they may begin in 2025.

A graph showing the growth of the federal reserve system

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Lock In Today’s Rates.  

If the Federal Reserve is about to start a rate cutting cycle, now may be the right time to lock in interest rates by buying longer-term debt, like Treasury, corporate or municipal bonds. Here’s why. If the Federal Reserve cuts interest rates by one percentage point over the next two years, the yield on short-term bank products could fall from 5% to 4%. That’s less than is currently offered on many Treasury bonds. In early May, Treasury bonds that mature anywhere from three to 20 years from now are yielding 4.6% to 4.8%.    

Locking in a slightly lower interest rate today on a 10-year bond may be more beneficial over the next decade than investing in a money market fund that pays a high interest rate today if that rate is about to fall over the next year or two.  

Considering Opportunity Cost 

Long-term investors sitting in money market funds or bank savings accounts should also understand what they may miss out on by not investing in stocks. While stock markets can rise and fall sharply, over the long term they’ve historically trounced the return on bonds and short-term bank investments. 

The S&P 500 has gained 10.7% on average annually since its introduction in 1957, a September 18 Business Insider article reported. The potential for higher returns is something long-term investors willing to accept the risk and volatility involved with stocks should consider before investing in money market funds and bank savings accounts. 

We pride ourselves on helping clients understand the pros and cons of their investments options as we develop a strong and customized strategy for them. We use our personalized  Plan Well, Invest Well, Live Well.™ strategic process to help clients gain confidence in their financial future, and we stay with them every step of the way to fulfill our ultimate goal of providing Absolute Confidence. Unwavering Partnership. For Life. Schedule a  complimentary consultation  on our website or by calling (860) 928-2341.  



Authored by Senior Vice President, Financial Advisor Leisl L. Langevin, CFP®, CDFA ®. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259 and 392-A Merrow Road, Tolland, CT 06084. 860-928-2341. www.whzwealth.com.  

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