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Inflation is a hot topic in today's world, especially since so many Americans are feeling the financial strain that comes with it. Additionally, inflation has surged in other countries, creating a global effect that some experts refer to as a perfect storm. The stock market in the U.S. is volatile, the prices of food and other essential goods have continued to rise and many workers have left the workforce altogether. As you go through this unique financial time, it's helpful to understand why it's worth having a savings account, even when inflation is high.
A savings account is a deposit account with a financial institution that bears interest. Most savings accounts have moderate to low interest rates, but some banks and credit unions can offer higher yields to qualified account holders. Having a savings account gives you a place to keep your extra money where it can earn interest. Savings accounts are generally safer and more reliable than other types of investment accounts, especially when a volatile market causes people to pull away from investing.
The federal government backs the funds stored in savings accounts with accredited financial institutions up to $250,000. Savings accounts are slightly less liquid than checking accounts but far more liquid than investment accounts. You can typically withdraw funds from your savings account at any time, although some financial institutions impose a penalty if you violate the withdrawal number limits. For example, your account might only allow six withdrawals a month before you incur a small fee.
Inflation refers to an increase in prices, which impacts an individual's purchasing power. When discussing inflation, financial experts typically refer to the price increase as a percentage. The percentage refers to how much more it costs to buy the same goods over a specific period of time. The opposite of inflation is deflation, which happens when a buyer's purchasing power goes up and prices go down. Between June 2021 and 2022, the consumer price index (CPI) for all urban consumers increased by 9.1%, which marks the largest increase during a 12-month period since 1981.
At the end of the day, you may be wondering how inflation impacts your savings account. Since inflation affects buying power, the money in your savings account isn't worth what it was before. For example, if you have $1,000 in a savings account that offers a 1% annual interest rate, you would have $1,010 after one year. But if the inflation rate was 5%, you would need $1,050 to maintain the same buying power as you did before the year passed.
For those living on their savings accounts, such as retirees or individuals who are unemployed, inflation cuts into their buying power significantly as prices continue to rise year over year. Medical, housing, and fuel costs tend to rise at the highest rates in the U.S., and these are essential items that people generally can't go without. Even those who are saving toward a goal, such as a down payment to buy a house or a college fund for a child, will experience a decline in the value of what they have saved.
Despite the fact that inflation can have a negative impact on your savings account, it's still worth having one. Check out these benefits of building your savings account:
Putting aside money for the future can help stabilize your financial situation and allow you to handle any urgent and unexpected needs that may arise. If your car breaks down and requires a costly repair, having money accessible to pay for it can help you get back on the road.
A savings account provides a place where you can work toward any financial goals you might have, such as buying a house or taking a vacation. You can use savings accounts for short-term and long-term goals, as well as urgent needs that come up.
Although the interest rates on savings accounts are modest, the funds in such an account do still earn a return. You also don't have to put in a lot of money to start earning returns, so savings accounts are within reach for people in many financial situations. Other investments, such as mutual funds and real estate, require more money upfront. Opening a savings account gives you the opportunity to earn a return without needing a significant amount of money right away.
Having access to your savings is important, especially when inflation rates continue to increase. You might need to use some of the funds to pay for goods and services as prices go up. Medical costs also tend to be affected by inflation, so a costly doctor or hospital bill could require you to get the funds you've saved to pay it off. Locking up your savings in a long-term investment that isn't accessible could be problematic when inflation is high.
A savings account is one of the lowest-risk places to keep your money, especially since the government insures the funds. By nature, a savings account doesn't lose money, even when the stock market declines and other investment opportunities are dropping in value. You don't have to worry about the volatility of the market when your money is kept in a secured savings account.
Open a high-yield savings account with Alliant Credit Union and take advantage of the benefits that come with setting aside money for the future. You can feel more prepared for whatever financial needs lie ahead while getting into the habit of saving.
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