Most memories of the Great Financial Crisis have faded. Except the lingering effects of zero interest rates. For 13 years, savers received no interest on their cash savings. Then, in a blink, we experienced a surge in post-Covid inflation and the Fed raised rates. Suddenly, cash feels really good. Does it feel too good?
Today, it’s easy to get over 5% interest on your cash savings. Checking accounts pay far less. That portion won’t earn much. After all, banks have to make money, too. For your excess cash, most banks have finally stepped up to the plate to keep your money.
If you have excess cash sitting around that is earmarked for some relatively near-term purchase, the advice to follow is not for this money. But this part is definitely for you. For your near-term money, take a quick look at what you’re earning on your excess cash in your bank accounts. If you aren’t earning close to 5% interest on it, you’re essentially donating money to your bank. That’s never a good plan.
For your cash without a near-term purpose, it may be time to develop a plan to invest it for the longer-term. Why? Because the days of earning over 5% in cash are probably approaching an end. The Fed is expected to lower rates as their fight with inflation is reaching the endgame.
To start 2024, when inflation was falling quickly, investors had thought we’d have already seen some rate cuts in the late-winter, early-spring. But, the Fed hit the pause button as the decline in inflation hit a temporary speed bump. Now, the current expectation for the first interest rate cut is at the Fed’s September meeting. A second and possible third rate cut is expected in November and December. Fast forward to summer 2025, investors are now betting that rates will be about 1% lower than today.
While this might not seem like much of a cut in rates, these expectations aren’t really factoring in the possibility of a recession. In that event, the Fed will very likely speed things up. With that, today’s comfy 5% cash savings rates will be in the rear view mirror and the question of what to do with excess cash will become more urgent.
Naturally, the time for the sense of urgency is before interest rates get cut or a possible recession is underway. Shifting some cash into medium-term, high-quality bonds might help you to “lock in” today’s interest rates. Certainly, this transition isn’t easy to consider while making 5% without any real risk. That sense of uneasiness is, perhaps, a subtle sign to begin moving outside of your comfort zone.
