Inflation can beat savings by making them lose value over time, but high-yield savings accounts can prevent that.
Many high-yield savings accounts currently offer interest rates that are higher than inflation rates.
This helps your savings keep their value, but predicted Fed cuts might change that soon.
If the Fed cuts its rates, then high-yield savings account rates might fall below inflation rates.
If you're letting your savings sit in a low- or no-interest account, such as a checking account, you could be losing money without realizing it. Inflation makes your money lose value over time since you'll need to spend more money to cover expenses and purchases.
Luckily, the best high-yield savings accounts offer rates that outpace inflation. However, this might not stay true forever, especially since the Fed is planning on cutting its rates soon. We've explained how current high-yield savings accounts beat inflation rates, and what Fed rate cuts mean for your savings.
How does inflation affect savings
In order to understand how high-yield savings accounts beat inflation, you first have to understand what inflation is. Patrina Dixon, CFEI, RFC, CEO of It'$ My Money, says that inflation is the rate at which the prices of goods increase, such as gas and food.
This means that your dollar is worth less over time since you have to spend more to buy the same goods you purchased last year. If you aren't earning interest on your savings by putting them in a high-yield savings account, CD, or money market account, then they are slowly losing value and purchasing power.
There are a few ways you can measure inflation. The most well-known is the Consumer Price Index, which uses average price changes from one year to the next to determine inflation.
But there are other ways to measure inflation. The Federal Reserve, which is the central banking system of the U.S., uses the PCE index, or the personal consumption expenditures price index, for its inflation calculations. They say they use the PCE over the Consumer Price Index because the PCE adapts to changes in spending patterns quicker. According to the Fed's July 31 meeting, the PCE is currently around 2.5%, which means the price of goods in general rose around 2.5% compared to last year.
Right now, many high-yield savings accounts are offering much higher rates than they have historically. "With the high-yield savings account, we are seeing averages between 4% and 5%, depending on the financial institution. And so, while inflation is relatively high right now, if you're saving or in a savings position, you are still coming out ahead," says Rianka R. Dorsainvil, CFP, founder and senior wealth advisor at YGC Wealth.
While this is great for savers hoping to beat inflation, interest rates might not stay this high for long.
When will the Fed drop rates
The Fed has stated that it plans to drop rates when inflation hits 2%. Right now, savings rate forecasts predict that the Fed will drop its rates soon, with the CME Fedwatch tool predicting an over 90% chance that the Fed will drop rates in its next meeting on September 18.
コメント