Fed Cuts Rate Again, and I Don’t Care
Earlier this week the Fed slashed the Funds Rate another 0.25%., which means that savings account rates nationwide will undoubtedly begin another session of racing toward absolute zero. ING Direct seems to be leading pack, as their rate just dropped down to 4.2% APY.
Guess what? I don’t care. Ever since I simplified my setup, more of my spare cash is going into a diversified set of mutual funds. Since fretting about savings rates will do absolutely nothing to actually change them, I’ve decided not to worry about them at all.
In fact, dropping interest rates have encouraged me to invest more money into mutual funds. Sure, there is more volatility involved, but the potential returns are much higher, especially over the long term. Aside from my modest emergency fund, I don’t plan to touch my small hoard of cash for the next few years. Therefore, I will stick that hoard into some mutual funds and try my best to forget about it until at least 2009. 
The moral of this tale is to keep your eye on the big picture. The market has ebb and flow, but fix your sight on the horizon. Though savings rates may now be the lowest they’ve been for years, they will rise again. After all, it’s in the banks’ best interest to offer high rates because there is more money to be made.
No matter what happens in the short term, keep this in mind: the path to (eventual) financial freedom may be windy and arduous, but two simple tricks will keep you on track:
- Save a little money every month. Whether it’s 5%, 10%, or 25% (wow!), reserve a small amount of your income as an investment. Make it automated for best results.
- Take that reserved money and invest it into a low-cost mutual fund, such as an index fund (or perhaps a Target Retirement Fund - which is often a pre-packaged portfolio of index funds.). Put as much as you can into a tax-deferred (or tax-free!) account, such as an IRA.
Let the Fed slash and burn. As long as you keep those two principles in mind, you are bound to come out ahead.
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