• Cash generally refers to relatively risk-free money, like that held in high-yield savings accounts or money market funds.
• Interest rates on cash rose to their highest level in years as the U.S. Federal Reserve raised borrowing costs aggressively starting in 2022.
• The Fed cut interest rates in September and more cuts are expected. Cash earnings are expected to fall, too.

The U.S. Federal Reserve cut interest rates in September, the first in a string of cuts expected at least into 2025. Earnings on cash are expected to decline as a result — likely leading investors to ask what they should do in response.

From a financial planning perspective, cash generally refers to money held in relatively risk-free assets, like a high-yield bank savings account or money market fund.

Cash is a kind of safety valve in investor portfolios, perhaps serving as an emergency fund or a reserve for near-term income needs in retirement.

Interest rates on such assets are expected to "fall closely in tandem with what the Federal Reserve does" with its interest-rate policy, said Ryan Dennehy, principal and financial advisor at California Financial Advisors in San Ramon, California. The firm ranked No. 13 on the 2024 CNBC Financial Advisor 100 list.

Investors saw interest rates on cash rise to their highest level in years as the Fed aggressively increased borrowing costs starting in March 2022 to tame pandemic-era inflation.

For example, many money market funds are paying roughly 4% to 5% in annual interest, following a lengthy period after the 2008 financial crisis during which their rates had languished near rock bottom.

Now, the Fed has begun cutting rates to take pressure off the U.S. economy since inflation has subsided. Fed officials cut their benchmark rate by half a percentage point in September. They forecast another half point of cuts through 2024, and 1 percentage point of additional cuts in 2025.

Of course, while expected, it's not a given the Fed will continue to reduce borrowing costs.

Gear cash to your goals, not interest rates

Investors can make some moves on the margins to boost earnings on excess cash, assuming Fed officials continue on their current trajectory, advisors said.

However, they shouldn't abandon their overarching financial plan and put that money at an elevated risk of loss, advisors said.

"Your cash allocation really needs to be geared toward your personal financial planning goals rather than what the interest rate environment might be doing," said Fatima Iqbal, an investment advisor and senior financial planner at Azzad Asset Management in Falls Church, Virginia, which ranked No. 58 on the FA 100.

Conventional wisdom suggests investors hold at least three to six months of expenses in cash-type holdings for emergencies, for example, Iqbal said.

This thinking shouldn't change in light of falling rates, advisors said. In other words, they shouldn't subject their cash to more risk if they may need it in the near term.

Additionally, cash often accounts for a relatively small portion of an investment portfolio, "so even with fluctuating interest rates, the impact to the overall strategy is minimal," said 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

That said, investors can consider reallocating any excess cash toward assets that are still relatively low risk and more likely to pay a higher return, advisors said.

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

"If I have an opportunity to lock in something a little bit longer [in duration] and I'm pretty confident the client won't want to sell it tomorrow, we're willing to do that," Trumbower said.

Dennehy, of California Financial Advisors, recommended a similar strategy for households with excess cash.  

Rather than holding a three-, six- or nine-month Treasury bond or CD, for example, investors can perhaps consider a duration of two or five years, Dennehy said.

The virtue of such a strategy is investors would guarantee their interest rate, if they were to hold their bond or CD to its full term. Money market funds, by comparison, have a variable interest rate that will fluctuate with Fed policy, Dennehy said.

When choosing one versus the other, investors essentially make a bet on the speed and trajectory of future Fed rate cuts, Dennehy said.

"Keep in mind, for the better part of the last decade, with money market funds and high-yield savings accounts you were earning less than 1% interest," he said. "Any amounts over 1% now is great, relatively speaking."