Top financial advisors suggest rethinking cash as the Fed lowers interest rates.

• Money held in high-yield savings accounts or money market funds is typically considered low-risk cash.
• The U.S. Federal Reserve increased borrowing costs aggressively starting in 2022, causing interest rates on cash to reach their highest levels in years.
• In September, the Fed reduced interest rates, and further cuts are anticipated. Additionally, it is predicted that cash earnings will decline.

In September, the U.S. Federal Reserve reduced interest rates, marking the beginning of a series of cuts anticipated to continue until at least 2025. This move is predicted to cause earnings on cash to decrease, prompting investors to contemplate their next course of action.

Financially speaking, cash typically involves funds held in low-risk investments, such as high-yield savings accounts or money market funds.

An emergency fund or a reserve for near-term income needs in retirement, cash serves as a safety valve in investor portfolios.

Ryan Dennehy, principal and financial advisor at California Financial Advisors in San Ramon, California, stated that interest rates on such assets are predicted to "fall closely in sync with the Federal Reserve's interest-rate policy." The firm was ranked No. 13 on the 2024 CNBC Financial Advisor 100 list.

The Fed raised borrowing costs to their highest level in years, causing interest rates on cash to increase, in an effort to control inflation that began in March 2022.

After the 2008 financial crisis, many money market funds had low interest rates, but now they are paying roughly 4% to 5% annually.

The Fed has started reducing interest rates to ease the strain on the U.S. economy as inflation has decreased. The Fed reduced its benchmark rate by 0.5% in September and expects to cut it by another 0.5% by the end of 2024. Additionally, the Fed predicts cutting the rate by 1% in 2025.

While anticipated, it's not guaranteed that the Fed will continue to lower borrowing rates.

Gear cash to your goals, not interest rates

Assuming Fed officials continue on their current trajectory, investors can boost earnings on excess cash by making some moves on the margins, advisors said.

Advisors advised against abandoning their financial plan and putting that money at a higher risk of loss.

Fatima Iqbal, an investment advisor and senior financial planner at Azzad Asset Management in Falls Church, Virginia, advised that it is crucial to allocate cash according to personal financial goals rather than the interest rate environment.

Iqbal advised that conventional wisdom recommends investors maintain at least three to six months' worth of cash-type holdings for emergency purposes.

Advisors advised that their thinking should not change despite falling rates, as they should not expose their cash to more risk if they require it in the near future.

Even though interest rates fluctuate, the impact on an investment portfolio's overall strategy is minimal, according to Jeremy Goldberg, portfolio manager and research analyst at Professional Advisory Services in Vero Beach, Florida. The firm ranked No. 37 on the FA 100.

Consider locking in high rates with excess cash

Advisors suggested that investors may want to reconsider reallocating any excess cash into assets with lower risk and potentially higher returns.

Victoria Trumbower, a certified financial planner and managing member at Trumbower Financial Advisors in Bethesda, Maryland, which ranked No. 31 on the FA 100, advised locking in an interest rate now in a federally insured certificate of deposit or U.S. Treasury bond.

Trumbower stated that if he has the chance to secure something for a longer duration and is confident the client won't sell it tomorrow, they are willing to do so.

California Financial Advisors recommended a similar strategy for households with excess cash, as advised by Dennehy.

Perhaps investors should consider a duration of two or five years instead of holding a three-, six- or nine-month Treasury bond or CD, Dennehy said.

If investors hold their bond or CD to its full term, they would be guaranteed their interest rate. In contrast, money market funds have a variable interest rate that is subject to change based on Fed policy, according to Dennehy.

Essentially, Dennehy stated that when investors choose between one and the other, they are essentially making a bet on the speed and direction of future Fed rate cuts.

"He stated that for the majority of the past ten years, you were earning less than 1% interest from money market funds and high-yield savings accounts. However, any interest rate above 1% is now considered impressive, in comparison."