Americans holding large amounts of cash in savings accounts and money market funds may be losing purchasing power faster than they realize, according to Citi Wealth, which is urging investors to rethink oversized cash positions as inflation outpaces the returns available on many cash investments.
The warning comes after the latest inflation data showed price pressures accelerating across the U.S. economy. The Consumer Price Index rose at an annual rate of 4.2% in May, the highest level in three years. At the same time, the Personal Consumption Expenditures Price Index, the Federal Reserve's preferred inflation gauge, climbed to a seasonally adjusted annual rate of 4.1%, marking its highest reading since April 2023.
Those figures are now running above the yields investors are earning on many traditional cash vehicles. According to Crane Data, the annualized seven-day yield on the Crane 100 list of the nation's largest taxable money market funds stood at 3.46% as of Sunday.
That means investors keeping large sums in cash are effectively earning negative real returns once inflation is taken into account. "The numbers today really indicate that clients should be decreasing the excess cash outside of what they really, really need," Olaolu Aganga, head of portfolio construction and analytics at Citi Wealth, told CNBC. "On a real yield-adjusted basis, so factoring in inflation, they're not getting that much."
Americans continue to park record amounts of money in cash-like investments. According to the Investment Company Institute, roughly $7.9 trillion is currently sitting in money market funds, well above historical averages.
While higher interest rates over the past several years made cash an attractive place to wait out market uncertainty, Citi argues that the current inflation environment has changed that equation. If inflation continues to exceed cash yields, the real value of idle money steadily declines, reducing purchasing power over time.
That does not mean investors should eliminate cash. Aganga emphasized that cash remains an essential part of a well-balanced financial plan. Maintaining liquidity can help investors avoid being forced to sell stocks during market downturns, provide funds for unexpected expenses, and allow investors to take advantage of buying opportunities when markets fall.
Instead of focusing on arbitrary percentages, Citi recommends determining cash needs based on expected spending over the next 12 to 24 months. Once those short-term obligations are covered, investors should evaluate how to deploy any remaining excess cash based on desired returns, liquidity needs, risk tolerance, and income objectives.
For investors seeking income while accepting some market volatility, dividend-paying stocks may provide an attractive alternative to cash. Dividend-paying companies can generate regular income while also offering the potential for long-term capital appreciation, although their prices can fluctuate during periods of market stress.
Investors who are uncomfortable moving additional money into equities may find better opportunities in fixed-income investments, Citi said. Aganga favors short-duration bonds with maturities between one and three years. Historically, shorter-term bonds have proven more resilient than longer-dated debt when interest rates rise because they are less sensitive to changes in bond yields.
She also recommends focusing on higher-quality securities, including U.S. Treasury debt and investment-grade corporate bonds, rather than stretching for additional yield in lower-quality credit."Nominal yields remain high in a historical context, but credit spreads sit near historical lows, which makes active management and security selection important," Aganga said.
