Money Management

The Federal Reserve’s upcoming meeting could have big implications for your savings account interest rate. Keep reading for what you need to know. [[{“value”:”

If you have a high-yield savings account, you know firsthand that it has been an excellent time to have some money set aside. In fact, for many people in the millennial generation and younger, the current interest rate environment combined with the surge in online banking has created the highest savings account interest rates in their adult lives.

Unfortunately, the high savings account interest rates many Americans are enjoying right now might not last for much longer. In fact, there’s a high probability that Sept. 18, 2024 will mark a major turning point. Here’s why, and what you can do about it if you have money in a high-yield savings account right now.

Why Sept. 18 is such a big day for savers

The policy-making body of the Federal Reserve — known as the Federal Open Markets Committee (FOMC) — meets eight times a year to make decisions on monetary policy.

Most significant for our purposes is the benchmark federal funds rate, which is set by the FOMC. This is the rate banks charge to lend each other money overnight, but it has big implications for consumer interest rates. (Note: When you hear someone say, “the Fed cut rates,” it typically refers to the federal funds rate.)

Without turning this into an economics lesson, here’s the key reason why the Fed raises or lowers rates. If the Fed feels that the economy is overheated, such as with the high inflation we saw in 2022 and 2023, the Fed will raise the federal funds rate. If inflation is low and/or unemployment is getting too high, the Fed will lower the federal funds rate.

The FOMC is meeting on Sept. 17 and 18. At the conclusion of its meeting — precisely 2 p.m. EDT on Sept. 18 — the latest interest rate decision will be announced. And the Fed is expected to lower the federal funds rate for the first time since the start of the COVID-19 pandemic in 2020.

The federal funds rate and your high-yield savings account

To be perfectly clear, the Fed’s interest rate moves are not directly connected to savings account interest rates. If it were, big banks like Bank of America and Wells Fargo would have much higher savings interest rates than they do!

However, savings interest rates tend to move in the same direction as the benchmark interest rates. And the correlation tends to be especially strong with high-yield savings accounts. After all, it’s not a coincidence that the federal funds rate is currently set to a target range of 5.25%-5.50% and the highest-yielding savings account on our best-of list currently pays 5.31%.

So, assuming the Fed actually cuts rates on Sept. 18, which is a virtual certainty at this point, you can reasonably expect your high-yield savings account rate to drop accordingly, very soon after. As an example, the last time the Fed raised rates, my HYSA rate increased within a day. I’d expect something similar, but the opposite, when it comes to rate cuts.

You might want to act quickly

There are two pieces of good news you need to know. The first is that Fed rate cuts are likely to be gradual. The current expectation is for a 0.25 percentage point reduction in September, and a total of 2.50 percentage points of rate cuts between now and the end of 2025. So, if your high-yield savings account has an APY of 4.50% right now, your rate will still likely start with a 4 after the Fed makes its first rate cut.

Second, if you have money in savings that you won’t need for a while, and you’re reading this before Sept. 18, there is still time to lock in a high yield via a certificate of deposit, or CD. Yields on CDs are at their highest level since before the 2008 financial crisis, and they can allow you to lock in today’s high rates and insulate your savings from the Fed’s upcoming rate cuts for the length of the CD term.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Bank of America and Wells Fargo. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

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You might be surprised at the long-term compounding power of the stock market, even if you only buy passive index funds. Learn more about it here. [[{“value”:”

Legendary investor Warren Buffett says that “it is not necessary to do extraordinary things to get extraordinary results.” While Buffett himself is widely regarded as one of the best stock-picking investors of all time, he also acknowledges that most people shouldn’t try to beat the market with individual stocks.

In fact, Buffett has said that the best investment most people can make in their brokerage account is a low-cost S&P 500 index fund, and then to hold onto it for a long time, regardless of what the stock market or U.S. economy is doing.

Although this might sound like a boring approach to investing, that doesn’t mean that it can’t build quite a bit of wealth over the long run. In fact, you might be surprised at how much a $500 monthly investment could produce in eventual retirement income.

The S&P 500 has been a strong performer over time

If you aren’t familiar, the S&P 500 is a benchmark index that consists of around 500 of the largest publicly traded companies in the United States and is designed to reflect the overall performance of the U.S. stock market. It is widely considered to be the best market indicator of the major stock indices.

From 1965 through 2023, the S&P 500 produced 10.2% annualized total returns (dividends plus stock price gains) for investors. In each individual year, the performance varied sharply — it was as high as 37.6% in 1995 and as low as negative 37% in 2008. But there have been far more good years than bad, and over long periods of time, there is no more surefire wealth creator than the S&P 500.

How much can your money grow?

As the headline suggests, let’s take a look at how much of a nest egg you can build if you invest $500 per month into an S&P 500 index fund and just leave it alone.

Of course, this depends quite a bit on how old you are, as well as when you’d like to start drawing retirement income from your investment. In other words, someone who starts investing $500 per month at age 25 would clearly have a larger IRA balance at 65 than someone who started at age 45. That’s not to say that it isn’t worth starting if you’re in your 40s or 50s (it definitely is!), but the point is that your timetable plays a big role.

With that in mind, let’s look at how much retirement income you can expect from monthly $500 investments into an S&P index fund. We’ll use the following assumptions:

10% average annualized total return, although there is no way to predict the actual long-term performance with complete accuracy.You use the “4% rule” of retirement, which says that you can safely withdraw 4% per year from your retirement investments, without fear of running out of money.

The best time to start

As you can see, while putting your money into a basic S&P 500 index fund might sound boring, the results are not — especially if you start early. The key is to make regular investments and hold on to your index funds, no matter what the stock market is doing.

Of course, an investment’s past performance isn’t likely to be exactly the same as its future results. But the point is that even if you want to put your retirement savings on autopilot with a low-cost index fund, you can still generate a massive amount of wealth over time. So, there’s no better time to get started than right now.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Considering buying a franchise? Check out this pros and cons guide first to learn vital tips for potential franchisees to make an informed decision. [[{“value”:”

When looking to become an entrepreneur, many first-timers consider buying a franchise. And that makes sense. Buying a franchise can be a big hit to your checking account, but it can be reassuring to know that you won’t have to reinvent the wheel to run your new business.

Here’s a closer look at the perks and drawbacks of becoming a franchisee.

Pros of buying a franchise

The benefits of buying a franchise are significant.

Less risk

The whole idea of a franchise is that you’ll be buying into a business and a system that has been proven to work, so much so that it’s been reduced to a process you can follow and get the same results. You won’t need to invent your own accounting process, for example. Owning a franchise, ideally, should be less risky.

Built-in support

Ray Kroc, the founder of McDonalds, put it best. With a franchise, “you will be in business for yourself, but not by yourself.” What that means is that the franchisor is your partner in success — if you succeed, the company succeeds. And as such, you’ll get ongoing help and advice.

An established process

You won’t need to invent, or re-invent, the wheel. Businesspeople who start from scratch have to figure everything out, from how to set up shop to where to buy supplies to how to market to and get customers. Not so for franchisees.

Cons of buying a franchise

But despite these obvious benefits, there are downsides for sure.

Not all franchises are created equal

Some franchisors give a lot of support, some do not. Some offer a great system, others don’t have all the kinks worked out. Some franchisors are honest and scrupulous, others are not; lawsuits against bad franchisors by unhappy franchisees are not uncommon.

The business may not be all it’s cracked up to be

Franchises are indeed popular for a very good reason: People like the idea of buying into a proven system where the kinks have been worked out and a success process is offered. Consequently, there are more than 800,000 franchises in the U.S. alone.

But before you buy a franchise, you must do your due diligence to make sure that you’re buying into a system and franchise that has a high likelihood of success and profitability.

You will have a partner and need to follow company rules

If you start a business on your own, you’re the boss. You make the rules. Not so with a franchise. In a franchised system, you have to follow its rules and brand guidelines. You may just be trading in an old boss for a new one.

Here, then, are the most important factors any potential franchisee needs to check out to make sure the pros outweigh the cons.

What do other franchisees say?

When you meet with the franchisor, the company will of course talk up the franchise and the system. After all, it’s their business, they invented it, they (hopefully) perfected it, and they want you to become a high-paying part of it.

That’s all well and good, but the fact is, you will learn way more by finding and speaking to current franchisees on your own. These folks will give you the lowdown:

Is the franchisor good or bad to work with?How easy or difficult is it to run this business?What red flags should you be aware of?Would they buy into it again?

Current franchisees (and any former ones, if you can find them) will give you the skinny on the real pros and cons of this venture.

What does the Franchise Disclosure Document reveal?

When you meet with the franchisor, you will receive a document called the Franchise Disclosure Document, or the FDD. This is a document mandated by federal law that discloses 23 different things about the franchise, including:

Item 1: This sets out the basic type of business you would be buying into, how long the franchisor has been selling franchises, the competition, and so on.Item 2: This item discusses the business history of the principal officers of the franchise.Items 8 to 17: These disclosures are the actual franchise contract you would sign, so these must be reviewed by your attorney.Item 19: This discusses some financial issues.

Notably, it’s difficult to discern exactly how much you might expect to make with a particular franchise. It’s not in the FDD. That’s because the franchisor doesn’t want to make promises — explicit or implied — that could open the company up to potential litigation. What if you don’t make the amount it says you will?

That’s another reason to speak with current and past franchisees.

What about the details?

There are factors to discover that can be very important, things that can turn a pro into a con in a hurry.

Exclusivity: You sure don’t want the same pizza franchise opening up down the street. What sort of territory exclusivity will you get?Supplies: Can you source your own supplies and inventory, or will you be required to buy them from the franchisor (and maybe at inflated prices)?Fees: Make sure you understand all of the fees: royalties, marketing and advertising, products, etc.Processes: Maybe you have some of your own ideas and systems. Can you implement them?

The bottom line is that while yes, buying a franchise can be a lucrative winner, it can also be an expensive loser. Do your homework before you buy in.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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