When the interest rate on a high yield savings account hovers around 1% to 2%, is it really a high yield savings account?
These days, my answer is “yes”. The rate may not seem exceptional, but to qualify as a high-yield account, it only needs to earn significantly more than the average savings account. Currently, that’s a low APY of 0.13%, according to the Federal Deposit Insurance Corp. So accounts that earn more than 1% check the box.
The problem is that inflation makes this number look very low. For August 2022, the US 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 from previous periods.)
This means that in a bank your money may have earned 1.5% interest, while 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 in the face of inflation, it’s important to remember the main reason you’re saving money: so it can be there for you when you need it.
Savings are not limited to the interest rate
Saving 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 money from one emergency fund covering the $500 bill is much better than adding it to a credit card balance. (This is where you can find high rates – even credit cards with the most attractive terms have rates above 15%. The problem is that you pay it, not earn it.)
If you’re lucky enough to have no unexpected expenses, your money in a high-yield account earns more than in a regular account. Let’s say you keep $5,000 in a savings account that earns 2% APY and don’t touch it for a year. Your balance would increase by approximately $100. In an account that earns near the average rate of 0.10% APY, you would only earn about five dollars after one year.
You can use a savings calculator to consider other scenarios. Although no realistic interest rate scenario keeps up with current inflation rates, it’s nice to earn as much interest as possible, especially for an account whose main purpose is simply to have money. cash in an emergency.
I must 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 will tie up your money for a while, maybe a year or more. And it 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 checking out.
Your savings rate is likely to increase for a while
Interest rates often rise after the Federal Reserve announces a rate hikeand the Fed has raised rates four times so far in 2022. The Fed is due to meet again on September 20-21 and will likely announce another rate hike.
I noticed that after these announcements, the financial institutions that already have the highest savings rates tend to be among the first to raise their rates again. Shop for a good rate now, and you may not need to shop later.
We cannot control interest rates or inflation. But what we can control is where we put our savings and how we think about them. Regardless of economic trends, if you put your money in a high-yield account, you have the best chance of getting the best possible rate and surviving an emergency without going into debt.