Prediction: Savings Account Balances Will Drop in 2025 for This Reason

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This financial writer thinks savings account balances will shrink in the new year. Read on to see why. [[{“value”:”

It would be more than fair to say that 2024 has been a great year for people with money in the bank. Both savings accounts and CD rates have been elevated since January, giving many people an opportunity to earn money risk-free.

But in the coming months, CD and savings account interest rates are expected to fall. And due to a combination of factors, I predict that savings account balances will be lower in 2025 than where they are today.

Why I think savers will start pulling their money out of savings

There’s a reason savings account and CD rates have been so attractive this year. The Federal Reserve spent much of 2022 and 2023 hiking the federal funds rate to slow the pace of inflation. And the Fed’s tactics worked.

In August, inflation was measured at 2.5% annually, according to the Consumer Price Index, an index that measures changes in the cost of goods and services. That reading — the lowest we’ve seen in years — is close to the 2% annual inflation target the Fed favors.

The Fed thinks 2% inflation in the long run leads to a strong, stable economy. And it’s been trying to get inflation closer to that point for years.

But now that inflation is cooling, the Fed is expected to start its benchmark interest rate to reverse its 2022 and 2023 hikes. Once that happens, two things are expected to happen.

First, savings accounts and CDs are apt to start paying less interest. Second, borrowing costs are expected to ease. People looking to sign car loans, mortgages, or personal loans may be looking at much lower interest rates.

This combination could drive a lot of people to pull money out of their savings and use it to pay for things like new cars or financed purchases, like furniture or vacations. And for this reason, I think the average savings account balance will be lower in a year than it is today.

Make sure you leave yourself enough of a cushion

If you’ve been parking your cash in a savings account for the past year or so in anticipation of making a large purchase, like a car, then there’s nothing wrong with sticking to that plan in the coming months as borrowing rates fall. But one thing you don’t want to do is remove money from savings to the point where you aren’t covered for emergencies.

Ideally, you should always have enough cash in savings to pay for three full months of essential expenses. This way, if you were to lose your job, you’d have a way to pay your bills without resorting to costly debt.

If you’re going to take money out of your savings account as rates fall, run the numbers to make sure you’re leaving yourself with a basic emergency fund. Also, be cautious about taking on debt even if borrowing rates come down.

You may, for example, be able to snag a much better rate on an auto loan next fall than this fall. But that doesn’t mean you should buy the most expensive car on the lot, or pay extra for every added feature your vehicle might come with.

You no doubt worked hard for your savings. You don’t want to blow that money just because it’s less expensive to borrow.

And remember, even if interest rates eventually fall to the point where you’re earning practically nothing in your savings account, that’s still the best home for your emergency fund. You can ditch CDs once rates come down enough, but always make sure your savings account has money to deal with unexpected expenses.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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