By: Jovan Johnson, MBA, CFP®, CPA/PFS
You have done a great job thus far! You have adapted the mindset and behavior of saving. It is important to always pay yourself first. However, it is not enough to only stash your cash away. Overtime, inflation will devalue all of the cash that is not being saved properly in an interest-bearing account. In this blog we will discuss four effective strategies to save your money in a way that will keep up with inflation!
Strategy #1: High-Yield Savings Account at an FDIC Insured Online Bank
A typical savings account at your standard brick-and-mortar bank pays an extremely low interest rate. According to Interest.com, traditional brick-and-mortar banks pay interest amounts between 0.01% – 0.03%. While on the contrary, online banks are able to pay a much higher interest rate on savings accounts due to the lack of physical locations. It is possible to find a savings account earning interest as high as 2.3% at an online bank. This demonstrates the benefits of saving in a high yield savings account at an online bank versus a traditional brick-and-mortar bank. However, it is still extremely important to ensure that the online bank is FDIC insured to protect yourself.
Strategy #2: Certificate of Deposit (CD) FDIC Insured Bank
Another effective and safe way to save your money, while keeping up with inflation, is a Certificate of Deposit (CD) account. A CD account is very safe and oftentimes provide a higher interest rate than a high-yield savings account at an online bank. However, the downside to a CD account is something known as the lockup period. CDs require locking up your money for several months or years, depending on the CD’s term. If you decide to withdraw money from a CD before the term expires, you will face an early withdrawal penalty fee, whereas a high-yield savings account at an online bank can be accessed at any time. If you are interested in achieving the higher interest rate that a CD offers, make sure to only deposit funds you will not need for the duration of the CD’s term.
Strategy #3: Money Market Funds SIPC Insured
If you have cash that you plan to invest in the near-future and want to park it in a place that earns a decent interest rate, this is where a money market fund comes into play. A money market fund is a place where you can store your cash and earn a great interest rate without as much risk as stock or bond funds. This is also a tool individuals use as an additional layer to protect themselves from dipping into their savings. Interest rates are typically competitive with high-yield savings accounts.
Strategy #4: Invest (stocks and bonds) SIPC Insured
With more risk, usually comes more reward. If you are willing to take on more risk for a greater return, stocks and bonds are your best choice. Stocks and bonds are investment vehicles that outpace inflation. One thing to keep in mind with investing in stocks and bonds is that you need to have a long-term perspective, as these accounts tend to fluctuate based on the market. This is why it makes sense to invest in stocks and bonds when you are saving for retirement (401k, IRA, etc.). There are many inexpensive diversified funds available that pool together individual stocks and bonds, making your job easier. The goal is to have your money work for you.
Now that you have the tools to put your cash to work, it’s time to utilize the best strategy for you. Let’s partner together to see which strategy applies to your overall financial goals.
