Cash savings deserve more respect

Cash savings never really seem to get enough respect. Yes, huge sums flowed into money market mutual funds and similar short-term savings vehicles last year. Cash savers could earn lush yields while taking scant financial risk. The tactic was opportunistic rather than fundamental.

Recent market commentary largely recommends slashing sums parked in cash and embracing stocks, bonds, and other riskier assets with better prospects for earning higher returns. Strategists reasonably expect the combination of lower inflation rates and Federal Reserve interest rate cuts will push down yields on cash savings in 2024. Time to move on, they write.

Market analysts may well be right about lower rates on cash savings this year, and the suggestion is largely directed at retirement portfolios. Nevertheless, I wouldn't underestimate the value of cash savings. Connie recently wrote me, and she welcomes the chance to make a decent rate on her savings.

"Once upon a time, saving money was considered a virtue. It was prudent. It was wise," she writes. "So people like me are left wondering about 'old fashioned virtues' like savings, and why no one is saying how fantastic it feels now to have our savings earning for us. This has been a huge factor in my life while trying to stretch my parents' savings and pay for their care without risking the principle. Same while looking after my mother-in-law."

A lot of attention has been paid to the high cost of borrowing as the Fed raised rates. But higher rates also mean that cash savers are doing better, especially as inflation rates come down. Saving in high-quality short-term cash and its equivalents is more attractive than spending currently. The power of compound interest is working for the patient saver.

Too much of the "slash cash" portfolio commentary puts too little emphasis on when the money might be needed for my taste. Odds are good that stocks will earn a higher rate of return than cash over time. Question is, when will you need the money? For example, it's a good bet that it wouldn't make sense for Connie's parents and mother-in-law to chase higher rates of return in riskier assets. They need their savings to pay bills and maintain their living standard.

Cash also provides protection against downside risks, against something going wrong, like a lost job or medical emergency. Cash may not be king, but neither is it trash.

Chris Farrell is a senior economics contributor for “Marketplace” and a commentator for Minnesota Public Radio.