Why It Finally Pays to Keep Your Savings in Cash Again

Good news for savers: interest rates on high-yield savings accounts and CDs are beating inflation.

For years, those who wanted to keep their cash safe and accessible were in a predicament. Savings accounts and CDs, even the best of them, paid interest rates below the rate of inflation. Alternatives like Treasury bonds were no better. As a result, savers could only watch the value of their money gradually diminish. 

The situation grew acutely painful in summer 2022 when inflation reached close to double digits, while most savings accounts still paid less than 1%. Since then, however, the Federal Reserve’s campaign to raise interest rates has significantly slowed rising prices.  In October, the consumer-price index was up 3.2% compared to a year earlier—down five basis points from the previous month.

Lucky for savers, the Fed’s rate hikes have also increased what banks are willing to pay out on savings with the best accounts are now yielding more than 5%. “Positive real yields,” are expected to continue for at least a few months,” says Ken Tumin, founder of rate tracking site DepositAccounts.

In other words, savings accounts can now help you actually earn money, not just keep it safe.

How inflation affects your savings

Cash is supposed to be the part or your financial portfolio that you can count on to be there when you need it. You don’t expect your cash to grow much in a bank account, but you don’t want it to lose too much ground either. 

For the past couple of decades, however, that’s exactly what’s happened. From 2000 through 2022, the average one-year CD yielded 1.46%. During the same period, inflation averaged about 2%. 

Until recently, the main cause of the disconnect was low interest rates. For most of the past 15 years, the Fed has kept its benchmark federal-funds rate near 0%: lowering rates, first, to support the economy in the wake of the 2008-2009 financial crisis and then again at the start of the coronavirus pandemic. Since banks base the rates they pay out in part on the fed-funds rate, savers suffered. 

Over the past few years, spiking inflation has compounded the problem, with savers sacrificing significant spending power. When inflation peaked at 9.1% last summer, the average payout for online savings accounts—which tend to be the most generous—was only 0.7%, according to DepositAccounts. The average for all accounts, including those offered by the nation’s largest banks, was less than 0.1%.

A mismatch like that can take a big bite out of your wealth. If inflation is, say, 5% and your savings account pays 1%, $1,000 in cash will be worth just $960 in a year. That means you’re faced with watching your purchasing power dwindle—or trying to make up the difference by taking on extra risk, investing in much riskier assets like stocks. 

Where to find inflation-beating interest rates 

You’ll need to shop around a bit to find a rate that beats inflation. The average savings account interest rate is just 0.46% and the typical one-year CD pays 1.79%. Most banks don’t need deposits badly enough to pay up for them, so they’ve kept their interest rates low.

However, there are plenty of options if you take a little time to look.

High-yield savings accounts

The best rates are not usually found at the nation’s largest banks, with huge branch networks. While they offer convenience, customers often pay for that kind of customer service in terms of lower rates and higher fees. 

Capital One 360 Performance Savings is Buy Side from WSJ’s pick for best overall high-yield savings account, while the UFB Direct is our current favorite for savers focusing on getting the best interest rate.

“The difference between an online savings account and the average brick and mortar account is huge right now,” says Tumin. Look for yields as high as 4% or 5%.

Certificates of deposit 

CDs pay higher yields to those who are willing to lock up their money for a specified period. One-year CDs from City Credit Union, for example,  were recently paying 6%.

Ultra-short-term bond funds

Ultra-short-term bond funds, which invest in government, corporate and other forms of debt, are another, potentially higher-yielding option for your cash. But they are subject to the ups and downs of the market, so you could lose money. Two to check out are the Vanguard Ultra-Short-Term Bond Fund (VUBFX) and the PIMCO Enhanced Short Maturity Active Bond ETF (MINT).

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