The high yield savings account era reset last week. Marcus by Goldman Sachs cut its rate to 3.85 percent on April 22. SoFi dropped to 3.80 percent the same day. Ally went to 3.75 percent on Friday. Discover, Capital One 360, and American Express savings are all now below 4 percent for the first time since the spring of 2023. The Federal Reserve is expected to cut rates 25 basis points at the FOMC meeting Wednesday, with the futures market pricing in a 64 percent probability, and the savings account rates have moved ahead of the announcement in anticipation. The era of effortlessly earning 4.5 to 5 percent on cash without thinking about it is over.
The math on what this costs varies by household but the average impact is meaningful. Federal Reserve data put the total in money market accounts and high-yield savings at $5.2 trillion as of February. The drop from a 4.5 percent average to a 3.8 percent average is 70 basis points, which on the aggregate balance translates to $36 billion in lost annual interest income. For a household with $50,000 in a high yield account, the difference is $350 a year. For a household with $200,000, it is $1,400. The compounding cost over five years on the larger balance is approximately $7,800 in foregone interest, assuming the rate gap holds.
The strategic question is what to do with the cash. The framework most personal finance advisors agree on starts with separating the money by what it is for. Cash needed within twelve months should stay in the high yield savings account or money market account. The reduction from 4.5 to 3.8 percent is real, but the alternatives that pay more either lock up the money or expose it to principal risk that does not match a short time horizon. The lost interest is the cost of liquidity, and the cost is justified for the emergency fund and the near-term expenses.
Cash that is sitting for one to three years has more options. Three-month, six-month, and one-year Treasury bills currently yield 4.10 to 4.30 percent depending on the maturity. The bills can be bought directly through TreasuryDirect with no fee, and the interest is exempt from state and local income tax, which adds an additional 0.3 to 0.5 percent of effective yield depending on the state. For Tennessee residents, the state tax advantage is small because the state has no income tax on wage income, but the federal yield is still higher than the savings account by 25 to 50 basis points. A short-duration Treasury bond ladder, which means buying bills with staggered maturities so that one matures every month or quarter, gives access to the higher yield without locking the money up.
Cash for longer than three years should probably not be sitting in cash at all. The historical equity premium over cash is roughly 4 to 5 percent annualized, and the longer the time horizon, the more meaningful the difference. The argument for cash over three years has typically been emotional rather than mathematical. The current environment, with the S&P 500 trading at 22 times earnings and Treasury yields between 4 and 4.5 percent across the curve, has tilted the math toward keeping less in cash than was justified two years ago. Even a conservative balanced portfolio of 60 percent stocks and 40 percent bonds is expected to outperform cash over a five-year period in any reasonable market scenario.
The CD market is the option most often pitched as the response to the savings rate drop. The five-year CD market is currently around 4.10 percent at the major online banks, which is higher than the savings account but locks the money up. Early withdrawal penalties on CDs are typically six months of interest, which on a five-year CD reduces the effective yield meaningfully if the money is needed early. The brokered CD market through Fidelity or Schwab offers slightly higher rates and the option to sell on the secondary market before maturity, though the secondary market price moves with interest rates. CDs make sense for known future expenses with a defined time horizon. They do not make sense for the emergency fund.
The other option getting attention is the floating-rate Treasury fund. Funds like USFR and TFLO hold short-duration floating-rate Treasuries with yields that reset weekly. The current yields are between 4.20 and 4.30 percent, slightly above the high yield savings rates, with the additional advantage that the yield will move down more slowly if the Fed cuts again. The expense ratios are 0.15 percent or lower at the major issuers, and the funds trade like ETFs with daily liquidity. For cash that is sitting between the immediate emergency fund and the longer-term portfolio, this is the option that most closely replicates the spirit of the high yield savings account at a slightly better rate.
What this all means in practice: do the math on what the cash is actually for. The drop below 4 percent is the prompt to look at the categorization, not to chase the highest advertised rate. The emergency fund stays where it is. The 12-to-36 month money has options. The longer money probably should not be in cash at all. The era of being passive about cash is ending. The next phase is going to reward the households that bother to look.