Highest savings yields are outpacing inflation




The Gazette, Colorado Springs



Personal finance fact: Your money loses purchasing power over time, especially if it’s in a savings account that isn’t earning interest. But there’s good news for savers: For the sixth straight month, the top savings yield is outpacing inflation, according to Bankrate data. The current savings rate environment features many top savings account annual percentage yields (APYs) actually outpacing 3.7% inflation. That wasn’t the case a year ago, when inflation was more than two times higher than it is now. Inflation peaked at 9.1% last summer. And you weren’t going to earn 9% on cash back then, “But over time, you want your cash earnings to be in the same ZIP code as inflation, just so you’re preserving your buying power,” says Greg McBride, CFA, Bankrate chief financial analyst. Here are seven reasons why keeping up with inflation matters. 1. A dollar today won’t buy as much as it will in the future. Prices generally increase over time. Money that isn’t keeping pace with inflation loses purchasing power over time. So, $20 left in your old winter coat in January 2019 could have bought $20 of goods back then. But now you’d need an extra $4.40 to make up the difference in rising costs and have the same buying power. That $20 at 4.06% APY would have earned $4.40 in interest during the same five-year period, but it would have been difficult to find that type of yield on an FDIC-insured CD five years ago. A 5-year CD at 3.40% APY would have been the closest option at that time, according to Bankrate data. But 3.40% APY, or anything, is better than zero. “If I have my money earning money at some percentage — even if it’s not exactly the same as inflation — and if I’m maximizing my savings, I get closer to meeting my inflation needs when inflationary periods hit,” says Jill Schlesinger, certified financial planner and business analyst for CBS News. 2. The highest savings yield doesn’t usually top inflation. Most of the time inflation outpaces the absolute top savings yield. This is a comparison of the absolute top savings yields from August 2015 through August 2023 compared with inflation, using the Consumer Price Index for all urban consumers. Higher yields may be available outside of federally insured accounts. But if they aren’t federally insured, then you’re taking a risk. At some banks, higher yields might also be capped and only available on certain balances. “When inflation is 9%, all cash underperforms inflation,” McBride says. “But over a longer period of time, if you’re seeking out the top-yielding account, you’re giving yourself the best chance to keep up with inflation,” he adds. People should plan on an average inflation rate of at least 3% over the long term, McBride says. 3. But you still want the highest APY possible. The highest yield should be your focus, as long as it’s at a bank insured by the Federal Deposit Insurance Corp. (FDIC). However, you want to look for consistency of APY because rates are generally variable. You also want to make sure the account has a minimum opening deposit amount you’re comfortable with and that it doesn’t have any fees that are going to eat away at your competitive yield. In March, Bankrate found that there were 25 “no excuses” savings or money market accounts in a survey of 63 banks. (“No excuses” means an account is nationally available, doesn’t have a monthly service fee, doesn’t have a minimum opening deposit requirement and there isn’t a minimum balance to earn the APY.) 4. The average savings yield hasn’t topped inflation in over seven years. Since August 2015, a savings account at the national average rate has only outpaced inflation during one month. And some of the big banks are currently paying even less than the national average rate. Those who are earning savings interest at or below the national average rate have an opportunity to better keep up with inflation by putting money in a savings account at an online FDIC-insured bank that’s paying a competitive yield. Also, don’t forget about money that’s sitting in a non-interest checking account that should really be put in a savings account if it’s not needed for many months. A Bankrate survey published in March found that 16% of people weren’t earning any interest, and 14% were unsure how much interest they were earning. “Now there’s a little more competition,” CBS News’ Schlesinger says. “The good news is that now, banks are threatened by money market funds that are paying more. And so the banks have to now raise their credited interest rates. And that’s good for consumers.” Say, for example, you saved $1,000 back in April 2020. To purchase the same items today that you would’ve bought with that money three years ago, you’d need an additional $183, or a total of $1,183, just to keep up with inflation, Schlesinger says.