What to Do With Your Savings During Inflation

From gas prices to food costs, the dollar is not going as far as it used to. With inflation still stubbornly high, it is important to find high-yield savings accounts that pay a high interest rate and invest your money to beat inflation. Here's what to do with your savings during inflation.

Does the interest rate on my account matter?

The national average savings rate is currently 0.43%. With the current inflation rate, the real value of your money is actually decreasing by 3.24% 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.

Most experts say you should keep three to six months of your expenses in your emergency savings account. Anything above that could result in needlessly losing money to inflation. You should do your research and find a high-interest savings account for your emergency savings.

While a savings account may not be a growth asset, a high-yield savings account can keep up with inflation in nominal terms as long as inflation is complemented with short-term interest rate changes. With the economy unpredictable, using short-term CDs and keeping some cash in a high-yield savings account can give you some time to get a better understanding of what longer-term inflation may look like.

Related: Best Places to Keep Your Emergency Fund

What is a good interest rate?

Earning a higher APY can make a big difference. A savings account's annual percentage yield, or APY, is the amount of interest you earn in a year. For example, $10,000 in an account offering the 0.43% national average would earn $43 per year. The same amount in an account earning a higher rate of 5.00% will earn $500 per year. This difference will compound over time.

You should look for banks that offer high annual percentage rates (APY). The higher the account's APY, the faster your savings will grow. What is a good interest rate for a savings account? Currently, the best savings accounts offer an APY over 5%. 

Six things to do with your savings during inflation

Understanding interest rates and how inflation impacts various aspects of the financial markets is only a part of the equation. Knowing how to best handle your savings during periods of prolonged inflation will help you to come out on the other end of it with as little damage to your own finances as possible.

Here are six things to consider doing with your savings during inflation.

1. Invest your money in the stock market

Investing in stocks is one of the best ways to keep up with inflation. Stocks typically outperform inflation over the long term, which is why many investors look to them as a way to protect their savings. Keep in mind that investing in stocks comes with a certain level of risk, so be sure to do your research before making any decisions. Dollar-cost averaging and investing consistently can help you meet your financial goals.

The 10 best days in the stock market in the past 20 years occurred after big declines including the 2008 financial crisis and the onset of COVID-19. If you invested $10,000 in the S&P 500 starting on Jan. 1, 2002, you would have had $51,766 by Dec. 31, 2022. If you missed the best 10 days during this time period, you would have had only about $30,000, or over 40% less.

In comparison, $10,000 sitting in a savings account averaging 0.40% a year over the same time period would be worth just $10,875. Over the long term, investing in the stock market is one of the most effective ways to beat inflation. The key is to build your investment portfolio based on your risk profile and investment objectives. Also, you should avoid investing any money you might need within five years, since the stock market can be volatile in the short term.

2. Look at TIPS

For those who prefer a safer investment approach, inflation-protected securities may be worth considering. Treasury Inflation-Protected Securities (TIPS) are government bonds that help protect you from inflation. While the returns on inflation-protected securities may not be as high as other investment options, they can provide peace of mind during inflationary times.

The principal balance of TIPS increase with inflation and decrease with deflation, as measured by the consumer price index (CPI). The higher inflation is, the higher your payments are. TIPS are also backed by the government. You can buy TIPS from TreasuryDirect or through a bank or broker.

3. Consider real estate

Another option for protecting your savings during inflation is to invest in real estate. Real estate can be a tangible asset that holds its value over time. Plus, it can provide a steady income stream through rental properties. 

While real estate investing also comes with risks, many investors find it to be a worthwhile way to safeguard their savings.

4. Invest in commodities

Investing in commodities like gold, oil, or agriculture products can also be a way to protect your savings during inflation. Commodities tend to hold their value over time and increase in price during periods of inflation. However, commodities can be a volatile investment option, so it’s important to approach them with caution.

5. Pay off variable-rate debt

To cool off inflation, the Fed raises interest rates to raise borrowing costs and slow down demand. You should focus on paying off variable-rate debt such as credit cards, a home equity line of credit (HELOC), and other debt impacted by higher interest rates. The average credit card interest rate is currently about 21%. The average credit card APR was at 16.17% in March 2022, before the Fed began its rate increases.The interest rate for those with subprime credit is as high as 30%

The difference between a 15% APR and a 20% APR can be thousands of dollars in interest. You should focus on paying off your high-interest-rate debt during times of high inflation. If you have a lot of debt, you can look at transferring your high-interest debt to a lower APR, get a debt consolidation loan, or ask your credit card issuer to lower your interest rates.

6. Save more

If you’re worried about the effects of inflation on your savings, it’s always a good idea to focus on reducing your expenses. This can involve simple steps like cutting back on dining out, finding more affordable housing, or using coupons and discounts when shopping. The key is to find ways to maintain your quality of life while spending less money.

When inflation is high and prices are rising, your money won't go as far. Keeping a budget can help you reduce your spending. Certain categories have increased more than others, so you may need to update how much you have budgeted per category. 

When necessities begin to cost more, reduce your spending and keep your costs low. Cancel unwanted subscriptions, eat out less often, and look for ways to save gas. Cutting back on your spending can help offset higher costs. Until prices return to normal, your money is less valuable. Adding more to your savings account can help you be prepared if high inflation continues to be a problem.