Cash-holding Americans just got some good news from the latest inflation report. With consumer prices rising faster than expected, the chances of a rate cut by the Federal Reserve appearing soon appear slim. In fact, traders have postponed expectations for a Fed cut until September, according to the CME’s FedWatch Tool. At one point they expected the reductions to begin in June. They also reduced the number of reductions planned this year. That means those who save money in money market funds and Treasury bills can expect to see their rates stay higher for longer. The seven-day annualized return on the Crane 100 list of the 100 largest taxable money market funds is currently 5.13%. “Money fund yields may not even fall below 5% at this point and will not fall until the Fed moves,” said Peter Crane, founder of Crane Data, a firm that tracks money markets. The appetite for money market funds is evident in the record amount of cash poured into products. Last week, there was $6.11 trillion in money market funds, up from $5.87 trillion in mid-December, according to the Investment Company Institute. “With short-term rates still at very attractive levels, I expect inflows to money market funds to resume after the tax season ends,” said Shelly Antoniewicz, deputy chief economist at ICI. Maximizing Savings Money market funds and high-yield savings accounts are a good place to park money for emergencies and other immediate spending needs because they are liquid, said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth . If you have six to 12 months of living expenses saved up and have cash on hand, you may want to consider transferring some certificates of deposit, she said. Just keep in mind that if you withdraw a CD before the expiration date, you will be penalized. Laddering typically involves spreading your money across several CDs with different maturities. However, it’s also possible to buy a short-term CD every few weeks, said Cheng, a member of CNBC’s Council of Financial Advisors. She doesn’t suggest going out for more than 18 months as short-term rates are higher than long-term rates. For those who have met their savings needs, Cheng suggests using excess money for a retirement account. She particularly likes Roth individual retirement accounts, which have income limits. Cash in Your CFP Investment Portfolio Barry Glassman, founder and president of Glassman Wealth Services, loves cash because it serves multiple purposes. “He’s there for an emergency fund. He’s there for expenses, so if there’s a downturn in the market, you don’t need to sell the stock at the bottom,” he said. “But even today the added benefit is that the risk/reward ratio is attractive and it is a diversification element.” He prefers Treasury bills, which have maturities ranging from four weeks to 52 weeks. “At current rates, short-term investments are no longer just a safe haven, but a sub-asset class,” said Glassman, another member of CNBC’s Financial Advisor Council. He considers Treasury bonds part of an investor’s overall bond portfolio. For his more conservative clients, he has built the portfolio quite a bit in the short term. For more aggressive investors there are fewer Treasury bonds. This is in line with a recent Vanguard report, which found that the level of liquidity in portfolios depends on the investor’s risk tolerance, investment horizon and level of funding. For those with a lower appetite for risk, who may not otherwise invest and save, having 10% to 15% in cash is fine, said Roger Aliaga-Diaz, global head of portfolio construction at Vanguard. “It’s important to continue saving and investing towards your goal,” he said. “I would rather give you a more conservative portfolio that allows you to sleep at night.” Cash also makes sense for those who are getting closer to their goal, whether it’s paying for college or tapping into their retirement savings. For these investors, 20% to 30% is a good allocation, or even slightly more if you’re really close to your goal, Aliaga-Diaz noted. “If you feel like the funding levels are at the right level that you need, you don’t want to risk that in the market,” he said. Then there are moderate-risk investors with longer time horizons, who Vanguard surveys show represent the majority of investors, he said. Their optimal liquidity allocation is zero, he said. First, cash has barely kept pace with inflation. Vanguard analysis shows that cash produced an annualized real return of 0.7% from 1960 to 2022. Stocks, on the other hand, saw an annualized real return of 6.3% while bonds returned the 2% after inflation. The asset manager also analyzed portfolios intended for retirement and university savings, finding that up to 50% came from market returns. “Putting money into a low-yielding asset like cash will really reduce wealth accumulation,” Aliaga-Diaz said. As for those who want to set aside cash to take advantage of market dips, he warns against this. In fact, Vanguard research shows that if an investor misses just a few weeks of recovery, he or she will underperform — and would have been better off riding the market down and up, he said. “If you could time the market perfectly, cash would work,” she said. “The problem is that it’s so hard to get out and back in” at exactly the right time.