Where should you stash your emergency cash when inflation is hot?
Many banks are finally increasing yields on their online savings accounts and certificates of deposit, following the rate hikes the Federal Reserve began in March to combat higher prices.
For example, Ally Bank increased the annualized return (APY) on its online savings account from 0.75% to 0.90% last week, while American Express increased the yield on its high-yield savings account from 0.65% to 0.75%. More hikes could be on the way after the Fed hiked interest rates again this week - this time by three-quarters of a point - and signaled a further 1.75 point hike for the rest of the year.
But even with the higher returns, those contingency savers face a problem: The dollars they stash away in those accounts will still lose value as inflation exceeds their returns. Don't dwell on it, experts say.
"At a time when inflation is at 8.6%, no liquid and safe option is going to come close," Greg McBride, Bankrate's chief financial analyst, told Yahoo Money. "Rather than looking at your emergency savings in the context of how if you're very lagging behind inflation, think of it as a 16% buffer against credit card debt when unplanned expenses occur."
Here are your options.
Emergency savings can save you from high-interest credit card debt. (Photo: Getty Creative)
Where to find the best savings returns
When it comes to getting the best APY for savings instruments, don't go to the big banks, said Ken Tumin, founder of DepositAccounts.com by LendingTree and a senior industry analyst. Instead, turn to online banks, which offer the best interest rates compared to the big providers.
"Online bank interest rates have increased this year," Tumin said. "In the last three months, rate hikes have accelerated."
The APY on online savings accounts started at 0.49% in March before the central bank made its first rate hike. According to DepositAccount.com, that rate was 0.73% in early June. For all banks, that rate was 0.13% in early June, reflecting the low, low rate offered by the big national banks.
Similarly, CDs offer a higher overall return because your money is locked for a period of time.
One-year CDs at online banks were trading at 0.67% APY in early March. By June 1, that rate rose to 1.49%. The average for all banks is 0.4%. For five-year CDs, online banks are offering 2.53% APY, up from 1.08% in March. For all banks the rate is 0.84%.
“You can see from these averages that opening an online savings account is the quickest and easiest. You don't need to switch banks, just connect to your checking account," Tumin said. "You get a much, much higher rate of return than this bank and you still have all the liquidity."
It's time to put more money into online savings accounts or CDs. (Photo: Getty Creative)
If you're still worried about inflation eating away at your savings, you might want to consider Treasury I bonds as well.
"Especially if you have less than $10,000, I-Bonds make more sense and are indexed to inflation," Tumin said.
But there are two main problems with I-Bonds if you look at them as a place for emergency savings. First, the annual purchase limit is $10,000 per person ($20,000 for married couples), which may not be enough for your entire emergency fund.
The other downside is that you cannot redeem them for the first 12 months after purchasing the I-Bond.
"So don't put all your eggs in this basket if it's your emergency fund," Tumin said. (All details on I-Bonds can be found here.)
After that first year, if you cash in five years ago, you're sacrificing three months of interest. But that's better than the prepayment penalty on most five-year CDs, which can range from six months of interest waiver to 30 months of interest. In certain cases, you could even lose capital, Tumin said.
Another option is to invest in Treasury bills and bills, which put pressure on banks to raise their CD rates, Tumin said.
"A lot of those returns are higher than what online banks are offering," he said.
Janna is the personal finance editor at Yahoo Money. Follow her on Twitter @JannaHerron.
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