Inflation is an increase in the price of goods and services. It is a natural facet of life, and no one can expect prices to remain frozen indefinitely. Unfortunately, inflation is quite high right now. In June, it hit 9.1%, which means that the price of most items consumers buy has increased by almost 10% year over year.
Inflation is not favorable to savers for clear reasons. If you keep your money in a bank that pays out a 1% or 2% return and inflation rises 10%, the amount of money in your account will not be able to buy what it used to buy. By the end of the year, you’d have somewhere between $101 and $102 while you would need $110 to acquire the same goods and services.
So, because the money that’s in your savings account is just sitting there losing value, the major question is whether you should keep money in it or do other things with it.
During periods of high inflation, what should you do with the money your savings?
Whether you should keep money in savings when inflation is on the rise depends on whether you want to save for a specific purpose.
If you have money set aside in case of an emergency or to spend it on a large purchase in a short amount of time, you should absolutely have it in a savings account. While the money’s value is decreasing now because returns are below the rate at which prices are increasing, the funds are still safe from significant losses in a FDIC-insured savings account as long as they remain there. The cash will also be there when you need it for unanticipated expenditures or your big purchase.
If the money is supposed to be a long-term investment and you won’t need access to it for years, you may not want to just let it sit in a savings account and lose value. Instead, you might wish to look into transferring the funds to a brokerage account where you could make investments that will hopefully produce returns that are near, if not equal or exceed, those of inflation.
Ultimately, if you have “extra” money that isn’t worth paying the price of losing any purchasing power just to keep the money accessible and avoid the danger of loss, then you should not have those funds in your savings account right now.
Making the most of your savings account
Everyone needs some money set aside for an emergency and short-term purchases, so you should look into high-yield savings accounts.
If you can discover an account that pays a fair interest rate while still allowing you to keep access to your funds when needed, this can help you protect the value of your savings account.
The good news is that there are several wonderful savings accounts to explore, as well as brokerage accounts where you can store the money you will be investing.
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