This Text Reprinted with permission 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 rates may not seem different, but to be called a high-income account, it has to earn more than the average savings account. Currently, that’s a measly 0.13% API, according to the Federal Deposit Insurance Corp. Check the box for accounts earning more than 1%.
The problem is that inflation makes that number seem small. The U.S. Bureau of Labor Statistics reported that the consumer price index for August 2022 was 8.3 percent higher than a year ago. (The CPI takes into account changes in the prices of certain items compared to previous periods.)
This means that your money in the bank may have earned 1.5% interest, in the real world, your money has lost 8.3% of its value. It’s hard to feel like your money is sitting in a “high yield” bank account with these numbers. But when it comes to inflation, it’s important to remember the main reason for saving money in the first place: to have it for you when you need it.
Check US Treasury rates here.
Savings is more than interest rate.
Savings is often paying for things you can’t plan for. Unexpected major car repair? I received it last month. I can tell you that transferring money from the emergency fund to cover the $500 bill feels a lot better than adding to the credit card balance. (Now here’s where you can get some of the highest rates – even the most attractively worded credit cards cost more than 15%. The problem is you’re paying it, not getting it.)
If you’re lucky enough not to have unexpected expenses, your money in a high-income account will earn more than it would in a regular account. Say you keep $5,000 in a savings account earning 2% APR and don’t touch it for a year. Your balance will increase by about $100. In an account that earns a close to average 0.10% API, you’ll only earn about five bucks after a year.
You can use a savings calculator to look at other factors. Even if the actual interest rate situation does not keep up with today’s inflation, it is good to earn as much interest as possible, especially if the main purpose is to have money readily available in case of an emergency.
I should add that you can earn a little more by investing your money in a certificate of deposit or buying a bond that can keep pace with inflation. But none of these lock up your money for a period of time, perhaps a year or more. And this prevents you from easily accessing your funds when you need them. If your emergency cushion is fully funded, however, these options are worth considering.
Also Read: What do student loan borrowers do after $10,000 or $20,000 of debt is written off? MarketWatch asked readers — this was their No. 1 answer.
Your savings rate may increase for the next period.
Interest rates have risen several times since the Federal Reserve announced rate hikes, and the Fed has so far raised rates four times through 2022. The Fed is set to meet again on September 20-21 and will likely announce another rate hike.
I have noticed that after these announcements, financial institutions with high savings rates will be among the first to raise their rates again. Buy now for a good price, and you may not need to buy later.
Read next: CDs are back in business with Treasurys and I-bonds as safe havens for your money.
We cannot control interest rates or inflation. But what we can control is where we put our savings and how we think about it. Regardless of the economy’s trends, if you invest your money in a high-yielding account, you’ll have the best chance of surviving an emergency with the highest possible return and without going into debt.
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Margaret Burnett writes for NerdWallet. Email: mburnette@nerdwallet.com Twitter: @margaret