How Inflation Impacts Savings and CD Rates: A Guide to Maximizing Your Earnings

Inflation is a double-edged sword when it comes to your wallet. On one hand, slowing inflation can lead to lower prices on everyday items like groceries and gas, making it easier to stretch your budget. On the other hand, it can also mean lower interest rates on savings accounts and certificates of deposit (CDs), reducing your potential earnings. To understand how inflation impacts savings and CD rates, it's essential to explore the relationship between inflation, interest rates, and the economy.

Inflation and interest rates have a direct relationship. When inflation rises, interest rates tend to follow, and when inflation falls, interest rates tend to drop. This means that borrowing money becomes more expensive when inflation is high, but your savings balances also grow faster. For example, in 2021, the average interest rate on a 30-year mortgage was just 2.96%, but after inflation spiked to an average of 7.1% in 2022, the average mortgage rate shot up to 5.34%. During the same time, the national average rate for 12-month CDs went from 0.13% to 1.07%.

To maximize your savings, it's crucial to understand how inflation impacts different types of accounts. Here are some accounts where your rate might increase when inflation goes up: * Checking accounts * Savings accounts * Money-market accounts (MMAs) * CDs * Treasury bills However, it's worth noting that inflation isn't the only reason banks change their deposit rates. For example, a bank might offer higher rates on savings accounts to attract new customers and more deposits. To earn more interest on your money, consider the following strategies: * Shop around for high-interest bank accounts, as some high-yield savings accounts pay over 4%, compared to the national average rate of 0.41% * Review the terms and conditions of your bank accounts to avoid unwanted fees, such as monthly maintenance fees * Consider accounts with fixed interest rates, such as CDs and Treasury bills, and choose a term that aligns with your financial goals * Think about the tax implications for each account, as you may be able to reduce your tax liability with certain types of accounts, such as T-bills, which are exempt from state taxes.