Your money loses purchasing power over time if it isn’t working for you.
The current savings rate environment features top savings account annual percentage yields (APYs) actually outpacing 4.9 percent inflation. And other savings yields are close to keeping up with inflation.
That wasn’t the case last year.
“(Inflation) was 9 percent last summer,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “You weren’t going to earn 9 percent on cash. 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.”
Here are seven reasons why keeping up with inflation matters.
1. A dollar today won’t buy as much in the future
Prices generally increase over time.
“Just think of it this way: The amount of stuff you could buy for a dollar 20 years ago, you can’t buy as much stuff today,” says Jill Schlesinger, a certified financial planner and business analyst for CBS News. “That’s it. That’s the easiest way to think about it. Because … prices are increasing.”
Money that isn’t keeping pace with inflation loses purchasing power over time. So $20 left in your old winter coat five years ago bought $20 of goods back then. But now you’d need an extra $4.22 to make up the difference in rising costs and have the same buying power.
That $20 at 3.9 percent APY would have earned $4.22 in interest during that 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 2.8 percent APY would have been the closest option at that time, according to Bankrate data. But 2.8 percent 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 — if I’m maximizing my savings, I get closer to meeting the inflation needs … when inflationary periods hit,” Schlesinger says.
2. The highest savings yield doesn’t usually top inflation
April was one of the rare times when the top savings yield tracked by Bankrate barely surpassed inflation. But it doesn’t happen often.
This is a comparison of the absolute top savings yields from January 2015 through April 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’s 9 percent, 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.”
People should plan on an average inflation rate of at least 3 percent 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 an FDIC-insured bank. Though you want to look for consistency of APY, since APYs 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 mean these accounts are nationally available, don’t have a monthly service fee, don’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 7 years
Since January 2015, a savings account at the national average rate has only outpaced inflation 7 percent of the time. And some of the big banks are 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 percent of people weren’t earning any interest, and 14 percent 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 three years ago you had $1,000 saved.
To purchase the same things you could have bought with that back then today, you’d need $1,183, Schlesinger says. “And if I have no way, if my interest on my savings account is essentially zero, I have to go spend down – I have to find an extra $183 somewhere to just spend.”
5. You need to factor inflation into retirement planning
No matter whether you’re many years from retirement or are already retired, you need to keep up with inflation during retirement because you’ll likely be earning less. And your top earning years are likely behind you.
“If you’re planning for retirement, and you are planning to say, ‘OK, I can live on $5,000 today,’ Well if $5,000 today is … not the same amount of money as $5,000 ten years from now, you’ll need more money,” Schlesinger says. “So the money that you have has to grow faster than the rate of inflation to simply meet the needs that you have.”
Inflation will definitely affect people in their 20s, with retirement around 40 years away for that age group.
- $10,000 in April 1983, has the same buying power as $30,767.04 in April 2023.
Inflation will affect someone retiring in around five or ten years both before and during retirement.
- $10,000 in April 2018 has the same buying power as $12,108.08 in April 2013.
- $10,000 in April 2013 has the same buying power as $13,046.13 in April 2023.
Here’s a look at how inflation impacts money today versus 20 and 30 years ago:
- $10,000 in April 2003 has the same buying power as $16,505.06 in April 2023.
- $10,000 in April 1993 has the same buying power as $21,066.88 in April 2023.
6. Inflation isn’t likely to go away
Even low inflation is still costing you purchasing power if you’re not keeping up with it.
“Essentially, a growing economy will have inflation,” Schlesinger says. “What we are seeking is a way to understand how the impact of higher prices can sort of worm its way into your life in so many different ways. So the reason why the Fed really does want to control inflation is that inflation is quite pernicious. It does (impact) every single person.”
7. High inflation and market losses were a double whammy in 2022
The S&P 500 was down 18.1 percent last year. And inflation peaked at 9.1 percent last June.
“If you haven’t been earning enough on your money, you can have, like, a double whammy,” Schlesinger says. “2022 is probably the worst year to think about in these terms because on one hand you had inflation (increasing) and on the other hand you had financial markets collapsing. So not only do you not keep up with inflation – you lost money. And that is not a good direction. I think it’s probably part of the reason why people are so, so negative right now. That they feel pummeled by the financial markets and they feel pummeled by inflation.”
Open an online savings account with a competitive yield in minutes
You have to make sure you’re not losing money simply by inertia, Schlesinger says.
“Let me ask you something, if you’re walking down the street and you saw $1,000, would you lean down and pick it up? Yes, I would. Well, then go lean down and pick up your money,” Schlesinger says. “That’s all I’m asking you to do.”
Money at an FDIC-insured online bank that’s within the FDIC’s limits and guidelines is backed by the full faith and credit of the U.S. government.
“It is risk-free money,” Schlesinger says. “OK? Where else in the universe of investing, with just a few keystrokes, can you find risk-free money? And that’s all we’re asking people to do. I know, I know you don’t want to do it. I know there are a million things you have to do. But for a thousand bucks, would you do it? For $500, would you do it? Maybe you wouldn’t do it for $10, but you would do it for some amount of money.”
Your money loses purchasing power when the yield it’s earning doesn’t outpace the rate of inflation. It’s easy to feel good about the money you have saved up, but the money you have right now won’t be able to buy as much in the future. Keeping up with inflation is a marathon, not a sprint. You can make sure you’re keeping up with it by having your savings in a competitive yielding account, and these are usually found at online FDIC-insured banks.
This article originally appeared here and was republished with permission.