There's a Good Chance Your Savings Account Is Hurting You. Here's Why — and How to Fix It
With inflation rising, where you store your cash is more important than ever.
Is your high-yield savings account costing you money? With inflation at 4.20%, your money is losing value unless it's in an account that earns at least a rate that keeps pace with inflation. The bad news is that many savings accounts, including high-yield savings accounts and CDs, are currently not outpacing inflation, and since the Federal Reserve is not raising interest rates, that's not likely to change very quickly.
There is good news. First, if there is a concrete end to the war in Iran, inflation could be at its peak, per David Payne of The Kiplinger Letter, meaning that you could regain purchasing power as inflation slows. Second, it takes some digging, but there are some savings accounts that earn rates to keep you on pace or ahead of inflation.
I'll start by showing you why not shopping around for better high-yield savings account rates erodes your purchasing power, and we'll find the savings account outpacing inflation. Finally, I'll outline three steps to get you back on track towards achieving your savings goals.
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The savings strategy costing you money
I understand the appeal of keeping your cash in the same place. However, most savings accounts (including high-yield) or CDs don't earn rates outpacing inflation currently. It means if you're still using these accounts, you're losing purchasing power.
This is why it's important to pivot as economic circumstances change.
How much does inflation eat into your savings? If you have a high-yield savings account with $50,000 in it earning 3.50% APY, while inflation is at 4.20%, you'd effectively lose $350 a year in purchasing power by keeping it in that account.
That's why even if your high-yield savings account was doing well before, you want to reevaluate it to find better options.
The savings solution that keeps you on pace with inflation
I review savings accounts weekly and haven't found many that keep pace with current inflation, aside from this account from Newtek Bank:
What I like about it is that it has retained higher rates even amid Fed rate cuts and inflation. It is also easy to set up an account; you don't have monthly fees, and if inflation cools and eventually lowers, your cash will have more purchasing power.
And if you're looking for any savings accounts outpacing inflation, I found one more option for you.
Are there any savings accounts outpacing inflation?
Yes, while the high-yield savings account from Newtek Bank will be the best fit for cash access, CDs also offer exceptional rates. The only caveat is that you must keep your money in one until the term expires, as CDs have early termination fees.
With inflation at 4.20%, the only CDs currently outpacing inflation are jumbo options. The best jumbo CD rates are 4.35%, but you'll need at least $50,000 to $100,000 on deposit to open one with many banks.
The good news is that maturity windows are only a year at most, allowing you to earn thousands effortlessly, while keeping ahead of rising prices.
Use this Bankrate tool to compare options fast:
The one thing to consider is that CDs have steep early termination fees. For jumbo CDs, this could be months of earned interest, costing you hundreds to potentially thousands of dollars. So, only do this approach if you're confident you won't need the money in the interim.
Meanwhile, if you're struggling to hit your savings goals, let's outline some strategies to help you get back on course.
What to try: 3 steps to maximize your savings yield
- Audit your current APY: If you have a high-yield savings account earning less than 4.20%, you're losing ground with rising inflation. Instead, look at Newtek Bank or a jumbo CD to increase your purchasing power.
- Designate a purpose: By setting specific savings goals, you give your cash purpose and direction.
- Know when to shift: Once you reach your savings goals, you'll want to devote more money to paying off high-interest debt or invest it, where you could earn returns much higher than inflation.
Ultimately, where you store your cash now matters more than ever due to rising inflation. Choosing a flexible option, like a high-yield savings account with Newtek Bank or a jumbo CD if you don't need access to your money right away, allows your cash to retain more of its purchasing power.
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