The Impact of Inflation: Preserve Your Savings with High Yield Savings Accounts
The Impact of Inflation
As an immigrant or child of immigrants, you may excel at saving money, but did you know that your hard-earned savings may be losing value? This unfortunate reality is primarily driven by inflation. Inflation refers to the general increase in prices and the subsequent decline in the purchasing power of money. Over the years, you’ve likely noticed the rising costs of rent, gas, and food. Inflation essentially means that the worth of a dollar today is lower than it was a year ago, significantly impacting our ability to buy what we need.
If you currently save your money in a regular savings account like Citi Bank or Chase, it’s like storing it under the mattress, as your hard-earned money is losing its worth. Why? The inflation rate surpasses the meager 0.09% annual yield typically offered by banks. With such rates, you only earn $9.00 for every $10,000 saved at the bank for a year! Fortunately, there are alternative options to safeguard your money and combat inflation. One simple yet effective approach is opening a high yield savings account.
What is a high yield savings account?
A high yield savings account allows you to deposit your funds and earn a superior interest rate. Generally, these accounts offer interest rates around 4-5%, translating to approximately $400 to $500 for every $10,000 saved in a year—almost 22 times more than a regular bank! Many online banks provide the highest interest rates and operate similarly to traditional savings accounts.
Rest assured that online banks are as secure as brick-and-mortar banks. Online banks, like regular banks, are FDIC insured, ensuring that depositors’ accounts are protected up to $250,000. This government-backed insurance covers both the principal amount and any interest earned in case the bank fails. Though bank failures are rare, knowing you can recover your deposited funds and interest offers peace of mind.
How does a HYSA preserve your savings?
To understand the impact of shifting from cash to a high yield savings account, let’s calculate the potential earnings. Consider the current interest rate offered by Wealthfront, which stands at 5.05%. Imagine saving $500 per month for 5 years (60 months). If you were to save this amount at home, your total savings would reach $30,000 over the 5-year period. However, by making monthly deposits of $500 into a regular checking account with a 0.09% annual percentage yield, your savings would amount to $30,571. On the other hand, depositing the same $500 per month into a high yield savings account would accumulate $34,125. While the interest of $4,125 may seem modest, it’s crucial to consider the impact of inflation.
It’s important to note that this strategy aims to minimize losses rather than generate substantial wealth. Additionally, the interest earned from high yield savings accounts is considered income for tax purposes and taxed at the same rate as your regular earnings. Nevertheless, this approach enables you to make money compared to losing purchasing power due to inflation. Moreover, it provides a secure place to store your cash while you continue to enhance your financial literacy and explore investment opportunities.
Where do I sign up?
Consider opening high yield savings accounts with reputable providers such as Wealthfront and Marcus by Goldman Sachs. These accounts do not impose any fees and compound interest on a daily basis. While they do not offer debit cards, you can conveniently transfer funds from your regular bank account to the online savings account using your account number and routing number. Opening an account requires no minimum balance, allowing you to start with as little as $1. Take the leap and open a high yield savings account today to begin earning interest on your savings.
Note: High yield savings accounts returns are in line with the federal funds rate. Which is the benchmark for interest rates on credit cards, mortgages and bank loans. Due to the recent increase of the federal funds rate the rate of return Wealthfront is offering is now 4.55%. (On June 11th, 2023) Our referral links provide a rate of 5.05% for Wealthfront and a 5.15% rate at Marcus both for the first 3 months.
