Savings simulator: Is your money beating inflation?

Walk past any bank and you’ll likely see savings rates advertised in the window.

That’s because, for the first time in many years, rates have climbed to 5% on some high-yield savings accounts. Much the same goes for other common financial products, like certificates of deposits (CDs) and money market funds, as the Federal Reserve has boosted interest rates to 20-year highs.

But there’s a catch.

“At the end of the day, there is no free lunch,” said Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments. “If money market or cash-like yields are higher, it’s likely because inflation is higher.”

Last year, consumer prices jumped at rates unseen since the 1980s, swiftly eroding the purchasing power of each U.S. dollar. To attract and keep depositors in this environment, banks have been dangling juicier returns.

For example, a $1,000 investment in a typical “high-yield” savings account in January 2021 — when inflation started picking up — was paying just 0.7% in annual interest at the time, according to Investopedia data.

Then, as the Fed ratcheted rates higher to combat inflation, the rate on that same account surged to 5% by early 2023, delivering much more generous returns. As the interest compounded, that initial deposit would have grown to $1,059.72 as of this August, for a gain of $59.72 on paper.

But that’s before adjusting for inflation. In reality, that balance is worth only $902.86 in 2021 dollars — a $97.14 net loss in purchasing power.

Some investment strategies have done a better job cushioning the blow from inflation — or even beating it — than others. But as the track record of even a high-yield savings account shows, it hasn’t been easy. Try out our simulator to see for yourself. Just pick an initial investment value to explore how three common financial products’ returns compare with stashing cash under the mattress. Then hit “Apply Inflation” to see how those current-day balances look in 2021 dollars.

On average, CDs — which promise a fixed rate for a deposit held for a specified period (like six months, one year or five years) — haven’t done much better than savings accounts at outrunning inflation lately.

A one-year CD in January 2021 offered a measly average return of 0.21% for the first year, and if a saver reinvested their balance in January 2022 after it matured, that same account was still paying a meager rate — in fact, a slightly lower one, at 0.15%, according to Bankrate data.

The Fed began its rate hikes in 2022, allowing the average one-year CD rate to rise to 1.41% by January 2023. This year, some banks have been offering 5% rates on 12-month CDs, well above the national average.

After twice reinvesting that $1,000 plus each year’s interest in a 12-month CD since the start of 2021, a saver’s balance would have grown to $1,011.79. But adjusted for inflation, the sum is worth only $862.03 in 2021 dollars, for a loss of $137.97 in purchasing power.

One of the few commonplace inflation-beating strategies would have been to invest in an exchange-traded fund (ETF) that tracks the S&P 500 stock index. That way, a $1,000 investment in January 2021 would have grown to $1,218.49 as of this August, netting a $218.49 return. That’s $1,038.14 adjusted for inflation — a $38.14 gain.

Short-term gains in the stock market are hardly guaranteed, since valuations fluctuate so much day to day. (The S&P 500 has fallen since August, the end point of this analysis because inflation data isn’t yet available for September.) But zoom out over at least 20 years, and stock market gains appear to offer among the most attractive returns — assuming the trend continues and you’re willing to stomach some volatility, said Goodwin.

“On any one-year time frame, it’s highly uncertain that the investor will have positive returns on an inflation-adjusted basis,” she said. However, “as you extend your time horizon — five years, 10 years, 20 years — the longer you are invested [in the stock market], the more overwhelmingly likely you are to have positive inflation-adjusted returns.”


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