Personal Finance Fact: Money loses purchasing power over time. This is especially true if you keep it in a savings account that doesn’t earn interest.
But there’s good news for savers. That’s the highest savings yield higher than inflation since March 2023, according to Bankrate data.
Despite the Fed’s recent announcement to lower the federal funds rate by 0.5 percentage points (50 basis points), the current savings rate environment has resulted in annual percentage yields (APYs) for many top savings accounts exceeding the rate of inflation. , currently stands at 2.5%. That wasn’t the case more than a year ago, when inflation was more than double what it is now.
Inflation peaked in the summer of 2022 at 9.1%. And back then, you wouldn’t have earned 9% on cash in a Federal Deposit Insurance Corporation (FDIC)-insured bank savings account.
Fortunately, inflation has dropped significantly, but top high-yield savings accounts are still outpacing inflation, even though the Federal Reserve has lowered interest rates and, in turn, banks have begun lowering APYs on savings accounts. Masu. Here is a breakdown of the inflation rate and a comparison with current savings account yields.
How does inflation affect savings?
Money that doesn’t keep up with inflation loses purchasing power.
Let’s say you spend $20 at a restaurant in August 2019. If you revisit that restaurant in August 2024, you could spend $24.54 to buy the same item you bought five years ago. Therefore, you should consider not buying appetizers and drinks or go for a cheaper meal. Or you’ll have to come up with an additional $4.54 to pay your bill.
This is how inflation affects savings. If you keep that money in a high-yield savings account that pays a competitive yield, you’ll be better able to keep up with inflation than money sitting idle at home.
Why it’s important to keep up with inflation
Earning an APY that not only keeps up with inflation but also beats it can help you maximize your savings at a time when prices for a variety of goods and services are skyrocketing. This ultimately allows you to buy more of what you want and need.
Here are seven reasons why it’s important to keep up with inflation.
1. A dollar today will not buy as much as it will in the future.
Prices typically increase over time.
Money that doesn’t keep up with inflation loses purchasing power over time. So if you had $20 left on your old winter coat in January 2019, you could have bought $20 of it back then. But you would need an additional $4.66 to make up the difference in cost increase and get the same purchasing power.
$20 at 4.06% APY would mean you’d earn $4.40 in interest over the same five years, but that kind of yield was hard to find on an FDIC-insured CD five years ago. At the time, a five-year CD with a 3.40% APY was the closest option, according to Bankrate data. But 3.40 percent APY or whatever is better than zero.
“If you are earning money at a certain rate, even if not exactly at the rate of inflation, and if you are maximizing your savings, you will be closer to meeting the needs of inflation when the inflation period arrives. ,” says certified Jill Schlesinger. Financial planner and business analyst for CBS News.
2. The highest savings yield is usually not higher than the inflation rate.
In most cases, the rate of inflation exceeds the absolute maximum savings rate.
It compares absolute top savings yields and inflation rates from July 2015 to March 2024 using the Consumer Price Index for all urban consumers.
Higher yields may be available outside of federally insured accounts. But if you don’t have federal insurance, you’re at risk. For some banks, higher yields may also have caps and may only be available on certain balances.
“When inflation is 9%, all of your cash is below inflation,” said Greg McBride, CFA, chief financial analyst at Bankrate. “But over a longer period of time, if you’re looking for the highest yielding account, you’re giving yourself the best chance of keeping up with inflation,” he added.
McBride says people should plan for average inflation of at least 3% over the long term.
3. But you still want the highest APY possible.
As long as the bank is FDIC-insured, you should focus on the highest yield. However, prices generally vary, so you should check for APY consistency.
You’ll also want to make sure your account has an acceptable minimum deposit and no fees that undermine competitive yields.
4. Average savings yield has not exceeded the rate of inflation for more than eight years.
Since October 2015, savings accounts at the national average interest rate have never exceeded the rate of inflation for a single month. And some of the major banks are now paying interest rates that are even lower than the national average rate. In May 2020, the inflation rate and the national average were the same.
People who earn savings rates below the national average rate have the opportunity to better protect themselves from inflation by placing their funds in online FDIC-insured bank savings accounts that offer competitive yields. .
Also, don’t forget about the money you have in your non-interest-bearing checking account, which should actually be moved to a savings account if you don’t need it for several months. A study published by Bankrate in March found that 17% of people were not earning any interest at all, and 11% were unsure how much interest they were earning.
5. Retirement planning must account for inflation.
Whether you’re years away from retirement or already retired, your income will likely be lower in retirement, so you’ll need to keep up with inflation. And your best-earning years will likely be behind you.
“If you’re planning for retirement and you’re going to say, ‘Okay, I can live on $5,000 today,’ if $5,000 today is not the same amount as $5,000 in 10 years. You’re going to need more money,” Schlesinger said. “That means the money you have has to grow faster than the rate of inflation to meet your needs.”
Inflation affects retirees for about 5 to 10 years before and during retirement.
- $10,000 in August 2019 has the same purchasing power as $12,270 in August 2024.
- $10,000 in August 2014 has the same purchasing power as $13,235 in August 2024.
Let’s take a look at how inflation is affecting money compared to 20 or 30 years ago.
- $10,000 in August 2004 has the same purchasing power as $16,612 in August 2024.
- $10,000 in August 1994 has the same purchasing power as $21,127 in August 2024.
Calculation source: CPI Inflation Calculator, Bureau of Labor Statistics
6. Inflation is not likely to go away.
Even with low inflation, if you don’t keep up with inflation, you lose purchasing power.
“Essentially, any growing economy has inflation,” Schlesinger said. “What we’re looking for is a way to understand how the effects of high prices creep into our lives in different ways. So why does the Fed really want to control inflation? Because it is harmful to everyone.”
7. 2022 was a double whammy of high inflation and market losses.
The S&P 500 index fell 18.1% last year. And the inflation rate peaked at 9.1% in June 2022.
“If you’re not making enough money, you can be in a double whammy,” Schlesinger says. “2022 is probably the worst year from this point of view, because on the one hand you have inflation and on the other hand you have financial markets collapsing.”
Open a competitive yield online savings account in minutes
Typically, you’ll find savings accounts with the highest APYs at online banks. Opening an account online is usually a quick and easy process. Information such as your name, social security number, date of birth, and address will be requested.
You can fund your new savings account by transferring money from your existing bank account. In many cases, you can deposit a check digitally by uploading a photo of the check.
These days, some high-yield savings accounts earn more than 20 times the interest rates offered by many large brick-and-mortar banks. To put that in perspective, if you put $10,000 into a high-yield savings account that earns 5.25% APY, you’ll earn about $538 more in interest after one year than if you put it into an account with just 0.01% APY.
conclusion
If the yield your money earns doesn’t exceed the rate of inflation, your money loses purchasing power. It’s easy to be satisfied with the money you’ve saved, but the money you have now won’t buy you as much in the future. Catching up with inflation is a marathon, not a sprint. You can ensure this by saving in an account with a competitive yield. Accounts are typically located at FDIC-insured banks online.
— bank rate writer marcos cabello and Karen Bennett Contributed to updating this article.
