Is inflation making your savings account pointless?

Inflation means any cash you’re holding in a savings account is losing value.

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By

Myles Ma

Myles Ma

Senior Managing Editor

Myles Ma is a health care expert & personal finance writer for Policygenius. He edits the Easy Money newsletter.

Published November 17, 2021|4 min read

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The consumer price index, a government measure of inflation, has gone up more than 6% in the 12-month period ending in October. That means everything is 6% more expensive, on average. And that means every dollar you have that isn’t earning greater than a 6% return is currently losing purchasing power.

Inflation means any cash you’re holding in a savings account is a boat with a leak. If your bank is paying less than 1% interest, as many banks are, inflation is sapping away the value of your money at this very moment. 

So is it time to move your money out of the bank? We asked experts what to do about inflation.

What are you saving for?

Before you withdraw all your money, it’s worth asking yourself a few questions: What am I saving this money for? And when do I need it? The latter question can help you decide what to do. 

Let’s say you’re using your savings account as an emergency fund. That means, above all, you need easy access to the money, because you have no idea when you’ll need it. You could put the money into a brokerage account so it grows faster, but it’s probably not worth the risk of not having access to the funds right away (With a brokerage account, to get the money out, you have to sell whatever you’re invested in. Your broker could take a few days to transfer those funds to a bank, and you might lose money on the deal).

The same holds true if the money is meant for a short-term goal like a down payment on a house. Yes, you could grow your money faster, but you’d rather have it available right away in case you have an offer accepted. Plus, the more an investment earns, the riskier it is. You don’t want to lose your down payment to a swing in the stock market.

“The negative impact on your life from losing some portion of that money will outweigh the positive impact of investing it to reach some additional level of return,” says Jeff McDermott, certified financial planner and founder of Create Wealth Financial Planning.

Where else can you put your money?

If you don’t need the money for emergencies or short-term goals, then it may be worth moving your money in response to inflation. There are financial instruments specifically designed to counteract inflation. Among these, Series I Savings Bonds are among the safest bets. 

These government-issued bonds earn 7.12% interest, a rate that’s available through April 2022.  You can hold them for up to 30 years, but the catch is you can’t cash out until a year passes. And if you cash out before five years, you lose the previous three months of interest. You also can’t buy them through a brokerage. You have to make an account on treasurydirect.gov

That’s still a good deal, especially compared to losing 6% a year to inflation, says Alvin Carlos, a certified financial planner and managing partner for District Capital Management.

“Even if you take it out after 12 months, you’ll probably still make around 4% or 5%,” Carlos says.

While these government-issued bonds are a true safe bet during this time of inflation, Carlos warned against several other assets that often get held up as good hedges against inflation, but which are far from a sure bet: gold, real estate, and Bitcoin. For gold, Carlos says, the idea is that it’s a finite resource, so it should have a stable value. Historically, though, it’s actually quite volatile, Carlos says, and it’s expensive right now. The value of property and property-related investments tend to keep up with inflation, but real estate is very expensive right now — ask anyone who’s tried to buy a house this year.

And like gold, Bitcoin is a finite resource, but also quite volatile. Carlos also warned against Treasury inflation-protected securities: TIPS for short. This is a more complicated financial product, but in some respects it works similarly to an exchange-traded fund: You can buy and sell it on a brokerage. But unlike I Bonds, TIPS can lose value. 

Ultimately the easiest thing to do is double down on something you’re probably already doing: investing in stocks. If you already have a diversified portfolio as part of your long-term financial planning, stick to it. 

“I’m not adjusting portfolios specifically to tackle inflation,” McDermott says. “My eye is still on how much risk is in the portfolio, how much would a real stock market downturn affect your portfolio, and making sure it’s a plan you can stick with.”

If you have money in a savings account that isn’t for emergencies or a short-term savings goal, yes, you can shift more of it into your stock portfolio or I Bonds. Otherwise, sticking to the same boring stuff that’s worked for you so far is probably your best bet.

“Don’t panic and stick with the long-term plan is what we always say,” McDermott says.

Image: H. Armstrong Roberts / Getty