Should You Pull Your Money Out of Savings if Interest Rates Fall?

I have a chunk of my money in a savings account with an APY that's above 4% right now. And seeing as how there was a time not so long ago when my savings account was barely paying 1%, that's a vast improvement.

But a big reason banks are paying so generously right now is that the Federal Reserve has raised interest rates 11 times since early 2022. And while that's caused the cost of borrowing to soar to the point where personal loans have become prohibitively expensive for many people, it's been a good thing for savers.

However, I realize that there will likely come a time when banks stop paying such high amounts of interest. And even if my savings' interest rate dips below the 1% mark, I'll continue to keep money in the bank. And you should plan to do the same.

It's all about protection

When you're working toward a long-term goal, like retirement, then it's best to invest your money rather than keep it tucked away in the bank. Over the past 50 years, the stock market has rewarded investors with an average 10% return (before inflation), as measured by the S&P 500's performance. Compare that to the 4% to 5% most high-yield savings accounts are paying today, and it's easy to see why investing in stocks is a better bet for far-off financial objectives.

But when it comes to near-term goals, the best place to keep your money is the bank. If you're trying to buy a home in two years, and you put that money into stocks, the market might crash and take a chunk of your down payment with it. And the market may not recover in time for you to buy a home on your timeline.

On the other hand, if you keep your down payment in a savings account, you're guaranteed not to lose out on any principal. This assumes that you're at an FDIC-insured bank and you're limiting yourself to a $250,000 deposit.

Also, you need money on hand to cover emergency expenses -- things like car repairs that could pop up out of the blue. And you can't risk losing a chunk of your emergency fund to a stock market crash. So that, too, is another reason to keep money in the bank even if interest rates fall. You need easy, instant access to your emergency fund at all times.

When will interest rates drop?

It's hard to say. A lot of that will depend on how inflation plays out in the coming months, but there's a good chance that today's interest rates will largely hold steady through the end of the year. They could drop a little, but it's unlikely that we'll see a drastic drop in the near term.

Things could change in 2024, however, especially if the Fed decides to cut rates after so many hikes. If you want to lock in the interest rate you're enjoying on your savings right now, the only way to really do that is to put money into a CD. But again, that's not something you should do with your emergency fund.

Now if you're sure you're a good two years away from buying a home and you decide to open a 12-month CD, that's not such a bad idea. But even then, you could risk an early cash-out penalty should you wind up wanting or needing your money sooner than expected.

All told, a savings account is not the most efficient option for growing long-term wealth. But it's important to keep money in one -- even during periods when interest rates are downright abysmal.