How to grow your cash savings as the Fed cuts rates
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The Federal Reserve's first rate cut of 2025 comes amid sticky inflation, putting cash savers in a tough spot: High-yield savings accounts, or HYSAs, could offer less interest as rates drop, while higher prices could also erode the purchasing power of their cash.
Why it matters: Certified financial planners tell Axios that HYSAs aren't dead just because rates are lower. Here's what to consider when deciding how to put your savings to work.
By the numbers: The average HYSA currently pays about a 4% annual percentage yield, compared with near-zero yields on most traditional checking accounts.
- Rate increases led to more consumers breaking up with their banks to switch to higher-yielding accounts, but HYSAs are still underutilized by savers, according to Santander.
- As rates start to come down, the amount of interest earned annually in a HYSA may also come down, which could push savers to find new ways to grow their cash holdings.
What they're saying: While stressing that all finance is personal, most consumers should start by dividing cash into three distinct buckets, Kyle McBrien, CFP at Betterment, tells Axios.
- Checking account: Keep just one month of expenses here for bills and daily purchases.
- High-yield savings: This is for planned major expenses one or two years out — vacations, weddings, tax payments, home renovations or property purchases.
- Emergency fund: This is where some consumers may be inclined to take on more risk, since emergencies are unpredictable and the money could feasibly sit untouched for longer.
Between the lines: How to store your emergency fund depends on your risk tolerance.
- More risk-tolerant: Consider investing part of your emergency fund in a conservative portfolio, one allocated to 70% bonds and 30% stocks, to hedge against inflation while staying relatively low-risk, McBrien says.
- Less risk-tolerant: Keeping cash in a high-yield savings account is still a solid strategy, especially for near-term expenses, he adds, saying that he plans to keep his HYSA even as the Fed cuts rates and these accounts are far from dead.
The bottom line: This is specific to cash holdings for investors and is not a recommendation for long-term investing.
Threat level: "I work with clients who have all of their emergency savings in a low-risk portfolio, other clients who keep everything in cash because they're terrified of the market," McBrien says.
- "What are you more afraid of? Are you more afraid of inflation eating into your money, or are you more afraid of the markets eating into your money?"
