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You may be one of the many experiencing a love affair with their cash. Who can blame you? Certificates of deposits, high-yield savings accounts and money market funds have been providing their most attractive interest rates (yields) in almost two decades, with some above 5%. But those yields may be headed down amid prospects of interest rate cuts by the Fed.

If you have CDs that are soon maturing or if you had opened a high-yield savings account to take advantage of its yield, the prospect of lower rates begs the question, what should you do with this cash?

The first answer is: Give it careful thought.

“The level of your cash reserves and where you put your cash depend on your goals and liquidity needs,” says Brian Amper, Executive Director, Financial Planning. “That’s why cash decisions need to be made in the context of your financial plan and where you are in life.”

Another way to think about it: Your cash is intended to fulfill a variety of functions, from daily activities to a purchase a year or two from now and the unexpected emergencies in between. The answer to where you should put your cash needs to be broader than just the yield you can get because the rules of that cash account or vehicle need to align with the needs you have for that cash to begin with.
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Different life stages, different cash needs

With the cash landscape potentially changing, it’s a good time to take a step back and consider how much cash you really need in the first place. As we’ve mentioned, your level of cash reserves will depend on a variety of factors, including personal risk tolerance, and should be considered in light of your overall financial plan.

However, our general guidelines are:

• If you’re in your working years, you should consider having cash reserves that cover six to 12 months of living expenses in case of job loss or unexpected emergencies.
• If you’re retired or self-employed with variable income, consider having cash reserves that cover 12 to 24 months, based on monthly portfolio withdrawals and fixed income sources used for living expenses.

We suggest larger cash reserves for retirees as your savings are no longer being replenished by steady employment. But, again, these are general guidelines.
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Excess cash? Invest it.

But, if you have been squirreling cash into CDs or money market funds to take advantage of higher yields, it may be worth asking if it’s resulted in having “excess cash” that you won’t need over the next 24 months. Or have you been hoarding your cash in soon-to-be maturing CDs or other cash instruments after feeling burned by the 2022 bear market?

Consult with your financial planner as to what would define excess cash for you, but if you have it, that cash could be better placed in a diversified investment portfolio.

Historically, returns of a diversified investment portfolio have outpaced the returns of cash vehicles over time.*

Stocks, in particular, are prone to volatility, but stock returns have had an upward bias and have outpaced inflation over the long term (though past performance does not guarantee future results).

Inflation also deteriorates the value of cash in vehicles like CDs and high-yield savings accounts. Depending on your risk tolerance and goals, consider seeking opportunities to get the best return on your hard-earned wealth while not sacrificing your short-term liquidity needs.
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Diversify your cash reserves and lock in higher yields

If the Fed cuts interest rates, yields on cash instruments would likely drop. That would bring down rates on a one-year CD. However, Amper says that banks may try to get ahead of future rate cuts by bringing down their yields on three- to five-year CDs even more.

“If your CD is maturing, and you have a bucket of cash within your reserves that you don’t need over the next year or so, you may consider rolling it into a one-year CD,” says Amper.

If you’re a CD investor, you already know that you can lock up the CD rate for its full term and that up to $250,000 is FDIC insured per account. But you also know that if you withdraw your money from the CD before it matures, you’ll likely face a penalty. You probably won’t need all your cash at once, so think of diversifying your cash reserves using different accounts that align with your varying liquidity needs. For example, consider staggering your CDs to have one maturing per quarter, so you have access relatively soon without penalty and/or have cash in a money market account. Remember, these are your cash reserves, so you don’t want to be penalized when you need cash immediately.

For cash, you may need between zero and 12 months. Let’s summarize some options with potentially higher yields than can pay more than traditional checking and savings accounts:

Bank Money Market Accounts

• Can access cash anytime, including by check or debit card, though may have withdrawal limits
• Yields fluctuate
• FDIC insured up to $250,000 per account
• Minimum deposits vary by institution, but higher balances may garner better yields
• May have minimum balance requirements

Bank High-Yield Savings Accounts

• Can withdraw money anytime and link the account to a checking account, though accounts may limit the number of withdrawals
• Yields fluctuate
• FDIC insured up to $250,000 per account
• May have de minimis balance requirements

Brokerage Money Market Funds

• May be able to withdraw money anytime, without penalty
• Interest rates may fluctuate daily (unlike CDs)
• Not insured by FDIC, but if in a brokerage account, SIPC may offer up to $500,000 of account protection
• Investment minimums vary

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For cash needs in 13 months to 24 months, options include:

Bank CDs

• Can’t withdraw without penalty until CD matures
• Yield is locked in for full CD term, which are typically six months, as well as one, three, five years
• FDIC insured up to $250,000 per account
• Minimum investment varies

I Bonds

• Must be purchased through Treasury Direct and are illiquid for 12 months
• If redeemed before five years, you will forfeit the previous three months’ worth of interest
• Maximum purchase is $10,000 per calendar per year plus $5,000 in paper I bonds via your federal income tax refund

There are a number of options to balance your liquidity needs with income from your cash amid the prospect of lower rates. As you evaluate your cash position, talk with your planner about which options may work best within your financial plan.

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* Based on 60/40 blended benchmark returns relative to cash for rolling 12-month periods from 1926-2023. “Cash” returns use IA SBBI US 30-Day T-Bill Infl Adj TR USD Index. 60/40 blended benchmark uses index proxies, as follows: 40% IA SBBI US Intermediate-Term Govt Bond Infl Adj TR USD, 50% IA SBBI US Large Stock Infl Adj TR USD, 10% IA SBBI US Small Stock Infl Adj TR USD. Index returns are provided as a benchmark and are not illustrative of any particular investment. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not a guarantee of future results.��