This article is reprinted by permission from NerdWallet.
When the interest rate on a high-yield savings account hovers around 1%-2%, is it really high-yield?
These days, my answer is “yes.” The rate may not seem exceptional, but to be called a high-yield account, it just has to earn a bunch more than the average savings account. Currently, that’s a weak 0.13% APY, according to the Federal Deposit Insurance Corp. So, accounts that earn above 1% check the box.
The problem is that inflation makes that figure seem extra small. For August 2022, the U.S. Bureau of Labor Statistics reported that the consumer price index was 8.3% higher than a year ago. (The CPI notes changes in the price of certain items compared to earlier periods.)
What this means is that in a bank, your money may have earned 1.5% interest, while in the real world, your money lost 8.3% of its value. It’s hard to feel your money is sitting in a “high-yield” bank account with those numbers. But in the face of inflation, it’s important to remember the main reason you save money in the first place: so that it can be there for you when you need it.
Check out U.S. Treasury rates here.
Savings is about more than just the interest rate
Savings is often about paying for things you can’t plan for. Unexpected major car repair? It happened to me last month. I can tell you that transferring cash from an emergency fund to cover the $500 bill feels a lot better than adding it to a credit card balance. (Now that’s where you can find some high rates — even credit cards with the most attractive terms have rates above 15%. The problem is you’re paying it, not earning it.)
If you’re lucky enough not to have unexpected expenses, your money in a high-yield account earns more than it would in a regular account. Say you keep $5,000 in a savings account that earns 2% APY and don’t touch it for a year. Your balance would grow by about $100. In an account that earns a close-to-average rate of 0.10% APY, you’d only make about five bucks after a year.
You can use a savings calculator to look at other scenarios. While no realistic interest rate scenario will keep up with today’s inflation rates, it’s nice to earn as much in interest as possible, especially for an account whose main purpose is simply to have ready cash in case of an emergency.
I should add that you could earn a little more by putting your money in a certificate of deposit or a lot more by buying a bond that can keep up with inflation. But either of these will lock-in your money for a certain amount of time, maybe a year or more. And that would prevent you from having easy access to your funds when you need them. If your emergency cushion is fully funded, however, these options are worth a look.
Your savings rate is likely to increase for the next while
Interest rates often rise after the Federal Reserve announces a rate increase, and the Fed has raised rates four times so far in 2022. The Fed is due to meet again Sept. 20-21 and likely will announce another rate increase.
I’ve noticed that after these announcements, financial institutions that already have the highest savings rates tend to be among the first to raise their rates again. Shop around for a good rate now, and you might not need to shop around later.
Read next: CDs are back in vogue with Treasurys and I-bonds as safe havens for your cash
We can’t control interest rates or inflation. But what we can control is where we put our savings and how we think about it. No matter the economic trends, if you put your money in a high-yield account, you have the best chance at earning the best rate possible and surviving an emergency without going into debt.
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Margarette Burnette writes for NerdWallet. Email: [email protected]. Twitter: @Margarette.
