Save, save, save! It’s a message you’ll hear frequently from financial educators, gurus, and financiers. But many fail to remember that if your savings account isn’t earning enough interest to keep up with inflation, you could actually be losing money despite your efforts.
This is because the cost of everything from food to rent and clothing increases over time. So even if you have the same amount in your savings as you did at this time last year, your money won’t stretch as much.
Does this mean you should stop saving money altogether? Certainly not. But this means that the interest rate you earn on your balance must be higher than the rate of inflation. Here’s how you can make sure that happens.
Inflation is a measure of how much prices rise over time, including the cost of basic necessities such as rent, utilities, food, and gas. As the prices of goods and services rise, every dollar you save buys less than before.
For example, in the winter of 2024-25, $911 was enough for the average family to cover their heating bills. But this winter, the average family is expected to need $995. This is an increase of 9.2%.
What does this mean for your savings? Even if your savings earn interest, the principal value of your money is effectively reduced if the interest rate is not higher than the rate of inflation. As a result, you will have a hard time paying your basic expenses.
Read more: Does the president control inflation?
At the beginning of 2026, the inflation rate will reach about 2.7%. So if you want your savings to beat inflation, you’ll need to earn more than 2.7% to account for changes in the inflation rate.
That’s why we recommend keeping your cash in a savings account that earns at least 3% APY. This will help preserve the original value of your savings while still keeping your money safe and accessible.
You are unlikely to beat inflation if you keep your savings in a big bank. According to the Federal Reserve, the national average interest rate on savings accounts is currently just 0.39%, for example.
However, many community banks, credit unions, and online banks offer rates above 3%. Here are a few specific account types that are most likely to earn you 3% APY or more.
If your savings account needs a higher interest rate, shop around for a higher yield savings account. HYSAs work like other savings accounts, but they earn a higher rate of interest.
These accounts are primarily offered by online banks, which can charge higher rates than traditional banks because they don’t have the overhead of operating physical branch locations. Today, the best high-yield savings accounts pay around 3%-4% APY.
For money you won’t need to access for at least a few months, try putting it in a certificate of deposit (CD) account. With CDs, you get an above average rate in exchange for agreeing to deposit money for a certain period of time. Like HYSAs, the best CD rates currently hover around 3%-4% APY.
Just remember that if you withdraw money from your CD before the expiration date, you’ll have to pay a pre-withdrawal penalty. Therefore, it is important to choose a CD term that matches your savings schedule.
Read more: How does inflation affect savings and CD rates?
A money market account is a type of savings account that typically pays a higher interest rate than a traditional savings account while still allowing relatively easy access to your money. Most MMAs include check writing or debit card access, although they may require a higher minimum balance than a standard savings account. Today, the best money market accounts pay 3% APY and up.
If you’re looking for non-bank accounts that earn 3% or more, consider investing in Treasury bills. With these assets, which are backed by the US government, you can deposit your money anywhere from four weeks to a year. Right now, T-Bills with 8-week terms offer the highest rates (3.64%).
Read more: How to protect your savings against inflation
