Inflation has been a major concern for all of us over the past few years, with prices rising significantly across almost every sector. Since February 2020, just before the pandemic began, prices have increased by 20.8%. If you’re not using the right savings strategy, your money could be losing purchasing power month after month. Understanding inflation and how to safeguard your savings is crucial in today’s economy. Let’s break down what inflation really means, how it impacts your finances, and the best ways to protect your money from losing value.
What Is Inflation and Why Does It Matter?
Simply put, inflation is the increase in prices of goods and services over time. Think back to what you used to pay for everyday essentials like milk, electricity, or even an oil change—those costs have gone up steadily over the years. But inflation itself isn’t necessarily a bad thing. In fact, the Federal Reserve targets a healthy inflation rate of around 2% annually.
Why 2%? Because when inflation is too low, it can lead to a drop in GDP (Gross Domestic Product), which is the total economic output of a country measured by the goods produced and services provided in a year. Low inflation can also cause decreased employment and slow economic growth. A steady 2% inflation rate means prices remain fairly predictable and the economy grows consistently.
The Downside of High Inflation
On the flip side, when inflation rates climb too high, it erodes the purchasing power of consumers. Simply put, each dollar buys less, which often leads people to cut back on spending, especially discretionary expenses like entertainment. This reduction in spending can slow down the economy and discourage saving because money loses value over time.
The Role of the Federal Reserve and Interest Rates
To manage inflation, the Federal Reserve adjusts interest rates, specifically the federal funds rate, which is the interest rate banks charge each other for overnight loans. This rate is set by the Federal Open Market Committee (FOMC). Currently, the federal funds rate sits between 5.25% and 5.5%, the highest it’s been in over two decades.
Here’s how it works:
- Low interest rates act like the gas pedal, making borrowing cheaper for consumers and businesses. This encourages spending and economic growth.
- High interest rates act like the brake pedal, making borrowing more expensive. This discourages spending and helps slow down inflation.
In 2021, inflation peaked at 7%, mainly due to stimulus money flooding the economy during the pandemic. Since then, these higher interest rates have been effective in bringing inflation down. As of June 2024, inflation has improved significantly to around 3%.
Why Your Savings Account Matters More Than Ever
With interest rates rising, it’s now possible to earn more interest on your savings. However, most traditional savings accounts pay very low interest rates, often below 1%. For example, the national average savings account APY (Annual Percentage Yield) is only about 0.6%. On a $10,000 balance, that means earning just $60 in interest over a year.
Here’s the problem: If inflation remains at 3%, you’re effectively losing $300 in purchasing power on that $10,000. After accounting for the interest earned, you still lose about 2.4% or $240 in real value annually. In other words, your money is shrinking despite sitting in a savings account.
High Yield Savings Accounts: A Better Alternative
High yield savings accounts are designed to pay significantly higher interest rates than traditional accounts, often outpacing inflation. One standout example is the UFB Direct Portfolio Savings account, which currently offers a competitive APY of up to 5.15%. This account has no minimum balance requirements, no maintenance fees, and even provides a complimentary ATM card for easy access to your cash.
Even better, you can boost your savings APY to as much as 5.35% by pairing the Portfolio Savings account with UFB Direct’s Freedom Checking account. With these rates, your savings can grow faster than inflation, effectively increasing your purchasing power over time.
For instance, with a $10,000 balance earning 5.15% APY, you could make $515 in interest annually. If inflation stays at 3%, your purchasing power loss would be $300, but after interest, you’d still see a net gain of $215. This is why high yield savings accounts can be a powerful tool against inflation.
What You Need to Keep in Mind
It’s important to note that interest rates on high yield savings accounts can fluctuate, primarily influenced by changes in the federal funds rate and overall inflation trends. To truly protect your money, stay informed about these economic indicators and adjust your savings strategy accordingly.
If you’re interested in maximizing your savings and protecting your money from inflation, consider exploring high yield savings options like UFB Direct’s Portfolio Savings account. Opening an account is quick and easy, typically taking less than 15 minutes.
Final Thoughts
Inflation is an inevitable part of the economy, but it doesn’t have to erode your hard-earned savings. By understanding how inflation works and leveraging tools like high yield savings accounts, you can preserve and even grow your purchasing power over time.
Remember, the key is to choose savings options that offer interest rates above inflation. That way, instead of losing money to rising prices, your savings can work harder for you.
Protect your financial future by staying informed, making smart choices, and taking advantage of the best savings tools available today.