Is Cash Now Trash Again? Federal Reserve Signals Intent to Lower Rates

Okay, we are going to move on to Tired Mama’s question. Tired Mama, somebody’s in the messy middle. Yep, she says, “Now that the Federal Reserve has signaled that they intend to drop rates, is cash now trash again? If so, where should I park my money if I need it in 3 to 5 years?”

Well, let’s talk about this, right? So, there was a common expression that you heard for the last, I don’t want to say decade, but it wasn’t, I’m going to say it for the last decade or so, where we would say, “Cash is trash, cash is trash, cash is trash.” And why were we saying that? It’s because interest rates had fallen to such a low point that at the end of the year when you got your tax document from your bank and you looked at it, you’re like, “Holy cow, I made 14 cents in interest last year.” And you’re like, “That is absolutely ridiculous. My cash isn’t making any money at all.” Well, fast forward now to 2023, 2024, present day, and interest on cash are fantastic. The rates are at like 5% plus on a lot of high yield money markets or money market mutual funds. So it’s not incredibly difficult to make a lot of money on your cash right now.

Well, Tired Mama said, “Hey, I heard the Fed said that they’re going to drop rates. Does that mean I need to stop holding cash? What’s the answer? Does that mean that immediately she should get out of all of her cash right now today?” No, I mean, but there is an educational moment here that I want to make sure that we educate our audience so there’s no surprises. See, we, I think the Fed, you know, it remains to be seen, but it could be as early as March or it could be the second half of the year. They’ve indicated that they will be dropping interest rates in 2024 and even through 2025, but they need to see some type of where the economy, you know, inflation’s moderating and the economy’s not overheating. That’s what they’re, that’s what they said at the last meeting. But anyway, here’s what I want you guys to know from an education standpoint. It’s pretty easy to get 5% on your cash right now. You know, the favorite thing out there are these brokerage money market accounts that I think about like Fidelity Vanguard and these money market mutual funds are paying over 5%. And then right below them, high yield savings accounts, they’re paying in the high fours. And then you’ve got CDs, depending upon how far you’re willing to go out on locking up your money for those periods, you can get high fours, fives all day long. But here’s what I need everybody to understand. The first accounts that are going to be impacted when the Fed starts lowering interest rates are those brokerage mutual funds. They will pretty much overnight probably adjust those yields as soon as that happens. The second place they’ll be impacted will be the high yield savings accounts. They won’t be as impacted. They will, as soon as they feel like they can get away with it, they will start lowering their interest rate too, but it just won’t be overnight like those brokerage mutual funds will. The last place is if you already bought a CD for the period of time you needed, it won’t be, if the one you previously bought will not be impacted. Now newer CDs, the new issue CDs will start reflecting the lower interest rates. So that’s why if you are somebody, just like Tired Mama talked about, she’s got three to five years, we are in one of these unique dynamic periods where if you think, “Hey, man, it would be nice to get 5% on my money for the next 24 months or so,” it maybe you should look at a CD or something like that. If as long as you can promise yourself you’re not going to need the money before that 24th month or 36th month, whatever you feel like is the appropriate time to hold it. It’s not the worst thing in the world. And I personally, I’m not changing. I’m in these brokerage mutual funds and I’m just going to wait until there’s an intersection point, meaning that the brokerage mutual funds, when they drop those money market rates below what my high yield savings account is, I’m just going to roll all my money back into those high yield savings accounts that have the FDIC insurance and everything else. So I’m going to do a wait and see, probably go into the high yield savings accounts after the brokerage accounts, brokerage money markets are below their yields. Now, this is what he did not say. “Hey, if rates drop and I don’t think they’re going to drop back to the rates that we saw them at previously, but if rates do drop and cash is paying next to nothing, does that mean that you should no longer hold cash?” Absolutely not. It is there for a reason. It’s why it’s part of the financial order of operations. Brian, you want to hold a thing for me? It’s why it’s in the steps. It’s why step four says you have to have an emergency reserve held in cash, even if rates drop. But just because rates are low doesn’t mean you should not try to find the highest rate possible for the cash that you’re going to continue to hold.