Inflation continues to take significant bites out of household budgets. July's CPI report showed prices rose by 3.4%. David Payne of the Kiplinger Letter says to expect inflation to end the year around 3.6%.
The war in Iran has driven up gas prices, which will keep prices higher for now. Even if the war ends soon and gas prices drop, Payne believes inflation could stay around 3.0% by the end of the year.
For savers, finding the right account is imperative to keeping ahead of rising costs. Here are smart strategies to adopt.
Do savings accounts really outpace inflation?
If you open a savings account at a brick-and-mortar bank, chances are you're going to be disappointed. Traditional savings accounts offer an average APY of 0.6%, well below inflation's projected 3.0% rate by the end of 2026.
However, the best high-yield savings accounts offer much healthier returns. Some of our top options, such as this one from Newtek Bank, offer a 4.20% APY, helping you outpace inflation.
Another perk is that many high-yield savings accounts come with low deposit requirements and no monthly fees. This helps you keep more of your money, which is important given inflation's impact.
How much can I earn with a high-yield savings account?
Let’s take our top pick, Newtek Bank, which currently offers a 4.20% APY. If you open the account today, leave your initial deposit untouched and the APY remains at 4.20% for a full year, here’s approximately how much you could earn:
- $10,000 deposit: $428.92 in interest
- $25,000 deposit: $1,072.30 in interest
- $50,000 deposit: $2,144.60 in interest
- $100,000 deposit: $4,289.20 in interest
These estimates assume interest compounds daily and that you make no additional deposits or withdrawals. Because high-yield savings accounts have variable rates, your actual earnings could be higher or lower if Newtek changes its APY during the year.
As you can see, this approach could help you earn significant gains effortlessly. This calculation assumes there will be no rate cuts from the Federal Reserve in the next year.
In fact, the opposite could happen. What August's CPI report shows could determine the Fed's decision at its next meeting in September.
Payne suggests that if the CPI report shows inflation rising again, it could force the Fed to consider raising rates by a quarter of a percentage point at its next meeting, with similar rate hikes possible at the last two meetings of the year.
What savings alternatives should I consider?
CDs are also smart options to consider. Unlike HYSAs, CDs feature fixed interest rates.
I like them because you can find terms that align with your savings goals, whether that's six months or five years. Best of all, many CDs offer rates well above inflation, helping you shelter your cash from its pressures.
You can shop quickly for the best CD rates using this tool, powered by Bankrate:
There are a few things to keep in mind with a CD. First, many come with terms that won't allow you to withdraw until it reaches maturity. If you need cash before that time, your penalties could be months of earned interest, negating its benefit.
Also, if you lock in a long-term CD now and the Fed hikes rates later this year, you could miss out on maximizing your growth. In the interim, I recommend choosing a short-term CD to ride out inflation's impact and the Fed's decisions.
Another option is a money market account. These are better suited for established savers, as many accounts require a minimum balance of $1,000. In many ways, these accounts offer the best perks of checking, as you can access your money anytime with a debit card.
Moreover, you'll gain all the perks of a savings account, including returns as high as 4.00%. This will also allow you to earn more money than inflation takes. However, as with high-yield savings accounts, money market accounts have variable interest rates. If the Fed cuts rates sometime soon, it could lower your returns.
If you're on the fence about savings options, this table can help:
Savings vehicle |
Cash access |
Minimum balance requirement? |
Best for? |
|---|---|---|---|
High-yield savings account |
Anytime you need it |
Most online accounts don't have balance requirements |
Savers looking to build an emergency fund or have cash access |
CDs |
When your term ends, outside of no-penalty CDs |
At least $500 |
Established savers looking to shield money from rate cuts/inflation |
Money market accounts |
Anytime you need it, though there might be restrictions on how often you can access it |
At least $1,000 |
Established savers looking for quick cash access |
Overall, there are several ways you can save money and stay ahead of inflation. High-yield savings accounts are the easiest, as they have the fewest restrictions and take only a few minutes to set up.
However, that doesn't mean you shouldn't consider CDs, too. The goal with them is to time opening one just right, especially if rising inflation forces the Fed to hike rates.
Not sure where your savings fit into your bigger financial picture? A financial adviser can help you decide how much to keep accessible, where to put your cash and how to balance saving with your other short- and long-term goals.
Use the tool below to connect with an financial professional who can help:
