Federal Reserve Chair Kevin Warsh did not soften his words when the Fed raised interest rates in September.
“The plain fact is that inflation is too high and has been for too long,” Warsh said at a press conference after the Fed voted 12-0 to lift its benchmark rate by a quarter point to a target range of 3.75% to 4%.
Prices rose 3.4% in the 12 months through August, according to the Bureau of Labor Statistics, with gasoline up 27.4%.
That is a problem for borrowers. It is also a quiet problem for savers, because money sitting in a typical savings account is falling behind.
The slow leak in your savings
The national average savings rate reported by the FDIC on Sept. 21 is 0.37%. At that rate, $10,000 earns about $37 in a year. The net result is a loss of about $300 in buying power a year on every $10,000, and it does not show up on a statement. The balance looks the same, or a little higher. It just buys less.
Cash still has a job. You need an emergency fund you can access quickly, and money you will spend within a year or two doesn’t belong in the stock market. The goal is to make that cash earn closer to the inflation rate, not to get rid of it.
Move your emergency fund to a higher-yield account
Rates on these accounts are variable and can drop when the Fed cuts, so check yours periodically. Make sure the bank is FDIC-insured, which protects deposits up to $250,000 per depositor, per bank, for each ownership category. The advantage of this type of account is that the money is there when you need it.
If you’re still at a traditional brick-and-mortar bank, you may be paying monthly checking fees while earning almost nothing on your savings.
SoFi offers a combined checking-and-savings account with no account fees. With eligible direct deposit or $5,000+ in qualifying deposits every 31 days, you can earn 3.10% APY on savings — many times the national average — plus 0.50% APY on checking. New members may also qualify for a limited-time APY boost that lifts savings to 3.80% APY for up to six months. (APY is variable and can change at any time.)
New members who set up qualifying direct deposit may also be eligible for a cash bonus of up to $400, based on the amount deposited. Terms apply — see details.
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Terms apply at sofi.com/banking#2. SoFi Bank, N.A. Member FDIC.
Lend to Uncle Sam for a few months
Treasury bills, short-term debt backed by the U.S. government, currently pay more than inflation. On Sept. 30, 13-week bills carried coupon-equivalent yields of 4.13%, 26-week bills 4.34% and 52-week bills 4.54%, according to the U.S. Treasury.
You can buy them directly through TreasuryDirect or through a brokerage account. The interest is subject to federal income tax but exempt from state and local income taxes, a perk worth checking on your return, because some Treasury owners end up paying state tax they do not owe.
The tradeoff is timing. Your money is committed until the bill matures, unless you sell it early through a broker at the going market price. Let an I bond track inflation for you.
Series I savings bonds are built for exactly this problem. Their rate combines a fixed rate with an inflation adjustment that resets every six months.
I bonds bought through Oct. 31 earn a 4.26% composite rate for their first six months, including a 0.90% fixed rate that lasts for the life of the bond. Treasury will announce new rates on Nov. 1 for bonds bought from then on.
The rules are strict. You can buy up to $10,000 in electronic I bonds per person each calendar year. You cannot cash them in for the first 12 months, and if you redeem before five years, you give up the last three months of interest. That makes I bonds a better home for money you will not need soon than for your entire emergency fund.
Match the account to the job
A simple way to sort it out: keep a few months of expenses in a high-yield savings account you can tap anytime, and put cash you will not need for six months to a year in T-bills or a CD. Money you can leave alone for longer may fit in I bonds.
The Fed cannot tell you when inflation will cool. Warsh made clear it is not there yet. What you can control is whether your cash keeps up while you wait.
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