With Inflation At 4.2%, Your Savings Account Is Losing You Money

Your cash feels safe sitting in the bank. With inflation at 4.2%, it's quietly shrinking.

The Math On Idle Cash

Inflation hit 4.2% in May, up sharply from 2.4% back in February. The climb has been steady, running through 3.3% in March and 3.8% in April.

Most of the jump came from higher energy prices tied to the Iran war. Even so, it's still far below the 9.1% peak from 2022.

The problem is that the average savings account pays just 0.62% a year, while prices are rising about seven times faster. Money earning less than inflation loses buying power over time.

At 4.2%, that gap adds up faster than most people realize.

It's like a slow leak in a tire. You don't notice day to day, but the cash gets weaker the longer it sits.

Figuring out where to park cash is exactly the kind of thing we cover in Market Briefs every morning, five minutes a day, and joining comes with a free course on finding investments.

Where The Yield Actually Is

The good news is your cash can earn a real yield right now, and yield is just the interest rate it pays you. Where you keep it depends on when you'll need the money:

• High-yield savings accounts: around 4%, versus that 0.62% average, with the same easy access.
• Short-term Treasurys: a 3-month bill pays about 3.7% and a 1-year about 3.9%, and the interest skips state and local taxes.
• CDs: the average one-year CD pays about 1.98%, but some banks offer more than 4%.
• I bonds: 4.26% if you buy before the end of October, but your cash is locked for a year and early exits cost three months of interest.

A money market fund is another simple choice, and it tends to pay close to those short Treasury rates. If you're in a high tax bracket, tax-free muni bonds can be worth a look, since the after-tax return can beat a higher headline rate.

You can also buy ultra-short Treasury ETFs, which trade like a stock and clear in a day. They charge small fees, often under 0.20% a year, for that easy access.

Worth Noting

The right spot comes down to one thing: when you'll need the money. Emergency cash should stay easy to reach in a high-yield savings or money market account.

Money you won't touch for six to twelve months can chase the better rates in Treasurys or CDs. Just don't lock up cash you might need tomorrow.

The gap between a big-bank savings account and a high-yield one is real money. Most people simply leave it on the table.

The safest move in a high-inflation year is making sure your cash isn't sitting still.

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