Investment Strategy

What to do With Your Savings During Inflation

First quarter GDP came in at a 1.1% growth rate, lower than the 2.0% estimate of polled economists. Most see some form of a recession or slower growth in the second half of 2023, and this number gives more evidence to the concern. This is the tightrope that the Fed is currently walking, trying to stem the tide of high inflation while not slowing down the economy to the tipping point of recession. From gas prices to food costs, the dollar is not going as far as it used to. In May 2022, the price of consumer goods was up 8.6% year over year.

With inflation at a 40-year high, it is important to find high-yield savings accounts, certificates of deposit, or shorter-duration treasury bills that pay a high-interest rate and invest your money to beat inflation.

To understand what’s happening to your money, we must first understand some basic economics. Interest rates can be expressed in nominal or real terms. A nominal interest rate equals the real and projected inflation rates. A real interest rate reflects the true cost of funds to the borrower and the actual yield to the lender or an investor.

For example, the national average savings rate is currently 0.07%. With the inflation rate at 8.6%, your money’s real value is decreasing by 8.53% every 12 months. Getting a low-interest rate means you are losing money.

Not only are bank accounts paying very little interest, but keeping the bulk of your money in cash means you are losing purchasing power. Let’s take a look at each of these categories and see what options are available.

High Yield Savings Accounts

As you are certainly aware, your local branch of Bank of America or Truist is not paying what you would consider a high-yield interest rate, far from it.

As mentioned, the national average savings interest rate paid to investors in brick-and-mortar banks is roughly 0.07%. So this means that you have to not only be comfortable taking your money out of a physical bank and placing it in an online institute, but it has to make sense financially. For example, $10,000 in an account offering the 0.07% national average would earn $7 annually. The exact amount in an online account earning a higher rate of 4.00% will earn $400 per year.

This difference will compound over time.

If the difference makes financial sense to you, then it’s time to start shopping around for high-yield savings accounts.

The following are some of the best, according to NerdWallet, and are insured by the FDIC, which is all that really matters.

Certificates of Deposit (CDs)

A  certificate of deposit (CD) is a savings account that typically pays a higher interest rate than traditional savings accounts. In exchange, you commit to keeping your money in the CD for a set amount of time, known as the term length. Withdrawing money from your account before the CD reaches maturity could result in hefty penalties. As of this writing, Fortune Magazine has compiled a top ten list of some of the highest-yielding CDs in the country.

The highest current CD rates for our top picks

  1. CFG Bank: 5.10% APY for 1-year CD
  2. Barclays Online: 4.90% APY for 1-year CD
  3. Ally Bank: 4.80% APY for 18-month CD
  4. Bread Savings: 5.10% APY for 2-year CD
  5. BMO Harris: 5.10% APY for 1-year CD
  6. Quontic Bank: 4.75% APY for 1-year CD
  7. Synchrony Bank: 5.15% APY for 14-month CD
  8. PenFed Credit Union: 4.70% APY for 18-month CD
  9. Sallie Mae Bank: 5.00% APY for 18-month CD
  10. Marcus by Goldman Sachs: 5.05% APY for 10-month CD

*Last updated April 27, 2023

Treasury Bills

Bonds, in general, can be somewhat confusing to the average investor attempting to navigate annual interest rates, yields to maturity, par value, etc. The U.S. Treasury issues government-backed debt based upon duration or length until maturity, categorized as bills, notes, and bonds. Treasury bills, or T-bills, are short-term U.S. debt securities issued by the federal government that matures over a time period of four weeks to one year.

T-bills are sold in increments of $100 (up to $10 million) and with a wide range of maturities. The most common terms are for four, eight, 13, 17, 26, and 52 weeks. With the current rate on 3-month T-bills at around 5%, you could bring in $500 for each $10,000 invested over an annualized period.

High-yield savings accounts, CDs, and treasury bills all allow you to earn slightly higher returns on your money than a traditional savings account. Just make sure you understand the pros and cons of each. High-yield savings accounts provide the easiest access to your money, but the interest rate you receive can fluctuate. CDs offer a fixed rate for locking up your money for a fixed period of time, but you’ll only earn the highest returns if you choose longer terms.

Treasury bills are shorter, and depending on your chosen term, you could lock your money up for as little as a few days or as long as one year.

Investment Strategy