Personal finance fact: Your money loses purchasing power over time, especially if it’s in a savings account that isn’t earning interest.
But there’s good news for savers: For the sixth straight month, the top savings yield is outpacing inflation, according to Bankrate data.
The current savings rate environment features many top savings account annual percentage yields (APYs) actually outpacing 3.7% inflation. That wasn’t the case a year ago, when inflation was more than two times higher than it is now.
Inflation peaked at 9.1% last summer. And you weren’t going to earn 9% on cash back then,
“But over time, you want your cash earnings to be in the same zip code as inflation, just so you’re preserving your buying power,” says Greg McBride, CFA, Bankrate chief financial analyst.
Here are seven reasons why keeping up with inflation matters.
1. A dollar today won’t buy as much as it will in the future
Prices generally increase over time.
Money that isn’t keeping pace with inflation loses purchasing power over time. So, $20 left in your old winter coat in January 2019 could have bought $20 of goods back then. But now you’d need an extra $4.40 to make up the difference in rising costs and have the same buying power.
That $20 at 4.06% APY would have earned $4.40 in interest during the same five-year period, but it would have been difficult to find that type of yield on an FDIC-insured CD five years ago. A 5-year CD at 3.40% APY would have been the closest option at that time, according to Bankrate data. But 3.40% APY, or anything, is better than zero.
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