Gen Z fell in love with high-yield cash savings. The Fed just crashed the party.

Gen Z savers and investors may have a cash problem on their hands, and the Federal Reserve is about to make it worse.

Banks are poised to pay less interest on high-yield savings accounts after the Fed cut its key short-term interest rate on Sept. 17, and signaled more rate reductions to come this year.

Now, many younger investors have to come to grips with the fact that their beloved high-yield savings accounts — and other cash investments like CDs and money-market funds — will be less lucrative going forward.

Many younger adults already have too much of their money in cash compared to stocks, bonds and other assets that can build wealth over decades, financial experts say.

“Younger investors do tend to keep more of their assets in cash than other age groups, which can put them at a disadvantage if savings-account rates decline, as might happen in the coming weeks or months after the Fed’s rate cut this week,” said Kate Ashford an investing specialist at the personal-finance site Nerdwallet NRDS. “Cash feels safe, but that big cash cushion could be more of a drag on their overall financial picture if the interest rate falls.”

The highest yield advertised on an online savings account was 4.35% in September, according to Bankrate data. That’s well above the national average of 0.61%, the site noted.

Scroll through TikTok, Reddit RDDT and other websites where young people flock for financial information, and it’s clear that the high-yield savings account is viewed as a key element in any sound financial plan. Social-media mentions of high-yield savings accounts are so common, the clunky phrase is often shortened to “HYSA.”

A closer look at TikTok hashtag use tells the story of cash’s growing allure. Year over year, use of the #HYSA hashtag on the platform has increased at a rate that’s roughly comparable with #STOCKS, according to TickerTrends, a data platform watching consumer patterns that’s geared at traders, hedge funds and institutional investors.

On TikTok, the #HYSA hashtag’s use was up 17.5%, while #STOCKS increased 18.7%, TickerTrends’ data showed. In the same span, the hashtagged mentions of #INTERESTRATES declined 9%.

The below chart shows three years of TickerTrends data on the #HYSA hashtag, running through the end of August. (The y-axis shows the daily view count of TikTok videos with the hashtag.)

“Too many people are falling in the high-yield beautiful trap and the companies love it,” Tyler Gardner told MarketWatch. The former portfolio manager and financial adviser now strolls through the woods talking to more than 2.5 million online followers on platforms including TikTok. Gardner said he gets “ripped apart” in the comments section when his videos question the wisdom of stockpiling too much cash.

It’s important for people to have a high-yield savings account for near-term cash needs like emergencies, Gardner noted. But it’s also important not to put more money than needed in the account, he added. As Gardner sees it, no more than 10% of a person’s investable assets should be in cash, especially when they are younger.

To be sure, many people flocked to high-yield savings accounts and other cash products as the Fed hiked rates several years ago — and not just younger demographics. For example, bank CDs held almost $2.89 trillion in the second quarter, up from $1.24 trillion in the first quarter of 2022, when the Fed started increasing its interest rate from nearly 0%.

And many younger Americans view the stock market and investing as a key way to build wealth. That’s underscored by the rise of retail investing platforms like Robinhood HOOD and eToro ETOR in recent years. Six in 10 people between the age of 18 and 28 said they invested outside of their 401(k), according to a Harris Poll this summer.

But many younger Americans are just getting started in their careers and adult lives. With early-stage salaries, they face a tricky balance; they have to stay afloat now, when living costs are high, and they have to invest to come out ahead in the long term.

Younger investors said they’ve increased their cash holdings at a sharper rate than older investors over the past year, according to an eToro survey conducted in August. The share of Gen Z investors with cash grew by 10 percentage points, to 71%, since a year prior, while it grew by 1 percentage point for baby-boomer investors, to 81%.

“Elevated cash holdings among young people may seem counterintuitive from an investment perspective, with conventional wisdom suggesting that they should be maxing out their investment contributions to let time do the heavy lifting. But reality often functions differently than theory,” said Bret Kenwell, an eToro U.S. investment analyst.

Read also: Gen Z’s surprising 2025 strategy aims to rewrite the playbook for young investors

Many Gen Z and millennial households have reasons to stay focused on cash, such as home purchases, renovations, weddings or starting a family, Kenwell noted. Investors, including younger ones, may also be selling assets and sitting on cash while they consider their next investing move, he added.

That said, people who have long-term horizons for investing and don’t feel they need excess savings “should remember the strong historical performance of a diversified portfolio — including assets like equities, bitcoin BTCUSD and gold GC00,” Kenwell said.

In the coming month, Gardner said he plans to pull together a video on where cash savers can turn, beyond high-yield savings accounts, as rates decrease. The responsible move for finfluencers should be educating viewers on the alternatives at this point, he said.

Money-market mutual funds are one place to look for yields, he noted. Though it’s up to banks on when they cut their offered savings rates and how deep those cuts go, these funds follow the Fed’s benchmark rate closely.

The average seven-day yield on the largest money-market funds was 4.07% on Thursday, according to Crane Data, a website following the money-market industry. That was already down a smidge after Wednesday’s rate cut. By late next week, the average rate will likely be below 4%, said Pete Crane, president of the site.

With money-market funds, “there’s no mystery. … They follow the Fed,” he said. On the other hand, banks may be “quick to cut and slow to hike,” he added.

Some financial planners told MarketWatch they noticed younger clients having an outsize inclination to hold more in cash. For some of Eric Roberge’s clients, cash “represents safety and security.” The firm that Roberge founded, Beyond Your Hammock, has an average client age of 42.

“It feels like more of a known entity versus the unknowns of the stock market, which, especially this year, has looked a little wild with all the volatility,” he said.

Though some clients may be spooked by the market’s swings. Roberge said he often has to walk them through the point that “too much cash sitting in a bank presents a risk, too, just as investing in the market does — instead of investment risk, it’s inflation risk or the risk that your money loses significant purchasing power over time due to inflation.”

The three major U.S. stock-market benchmarks — the S&P 500 SPX, the Dow Jones Industrial Average DJIA and the Nasdaq Composite COMP — closed Friday at all-time highs as investors absorbed the Fed’s rate decision.

So then, how much money should be in a savings account? It’s an ongoing question that remains important, no matter the interest paid on the account. The Fed is cutting rates because it wants to prevent the job market from further slowing.

The amount set aside for savings may depend on the answers to a couple questions, advisers said. How many people are working in the household? How much are their monthly expenses? How easy would it be to get a new job?

The size of an ideal emergency fund ranges between three months of expenses and at least six months, depending on circumstances, advisers said.

A high-yield savings account would also be a good way to save for upcoming expenses, like a vacation, a car purchase or a home’s down payment.

“Parking extra money in cash may slow down your long-term growth,” said Joe Boughan, founder of Parkmount Financial Partners in the Boston area. Cash is for emergencies, or for saving up for a large near-term purchase like a down payment, he noted. “The rest should be put to work.”