Inflation — or the increase in prices and the decrease in the purchasing power of money — is an economic concept commonly discussed in the news and among most adults as it affects cost of living, finances and savings. Right now, the inflation rate is 2.3% annually and has been over 2% for more than a year, according to the Consumer Price Index (CPI).
In comparison, the average savings account rate is still only 0.26% for nearly 9,000 savings accounts at banks and credit unions across the U.S. For certificates of deposit (CDs), the news is a little better. The average rate is 1.04% (for a one-year CD) among nearly 7,000 banks and credit unions.
While savings account and CD rates are finally starting to increase, very few banks and credit unions offer rates that will outperform the rate of inflation. In a new study, MagnifyMoney sifted through more than 15,000 personal savings accounts and one-year CDs to see where one could earn enough on their savings to keep up with the rate of inflation of 2.3%. Overall, the results were disappointing.
- The average savings account rate is only 0.26%.
- The average one-year CD rate is only 1.04%.
- Only 0.4% of the nearly 9,000 savings accounts reviewed last month offered an annual percentage yield (APY) greater than the inflation rate of 2.3%. Often, that savings account rate was capped at the first $500 to $5,000 on deposits.
- Only 3.4% of one-year CDs were yielding 2.3% or more in November 2018.
- Credit unions and online banks make up most, though not all, of the savings accounts and CDs that outpace inflation.
- Some of the best rates are offered by credit unions, for which membership for many may not be possible.
- Half of the savings accounts reviewed yield 0.15% or less annually.
- Half of the one-year CDs reviewed yielded 1.00% or less annually.
- Even though some of the one-year CDs reviewed are offering yields greater than the inflation rate of 2.3%, many interest rate observers expect inflation to increase even faster in the months ahead, meaning that inflation may still get the better of these deposits.
Breaking down the data
Let’s look at some data visualizations that highlight some of the key findings of this study. These three charts below will show you:
- The distribution of CDs with the best rates by financial institution (i.e., brick-and-mortar banks, online banks, credit unions)
- Distribution of 366 savings account yields
- Distribution of 396 one-year CD APYs
Check out this chart that shows which CDs beat inflation by financial institution type. Only 14 brick-and-mortar banks offer rates that compete with the current inflation rate.
This chart displays the distribution of savings account yields as of October 2018. Only seven savings accounts surveyed offer 2.3% or more.
You can see the distribution of one-year CD APYs across 396 CDs in the chart below.
Why many savings accounts and CDs aren’t outpacing inflation
Now that we’ve looked at the data and seen the statistics on savings account and CD rates compared to the inflation rate, let’s discuss two reasons why many savings accounts and CDs are not outpacing inflation.
Big banks play on convenience
Brick-and-mortar banks often compete over convenience, rather than on deposit rates. The price of offering a branch or ATM in as convenient a location as a Starbucks may be more affordable than offering better rates. When a bank snags new business because it’s a convenient option, customers may be less inclined to leave for a better rate.
The largest banks, which represent the largest share of low rate deposits, also have an interest in getting funds into their brokerage and investment accounts, rather than high-yield deposit accounts. In a brokerage account, the bank can earn money on trading commissions and fees on funds.
Online banks, regional banks and credit unions looking to compete with larger banks can’t win when it comes to the number of branches and locations they offer. Often, they don’t have a brokerage arm either. So they compete for new customers by offering attractive rates on deposits.
Inflation rates are increasing faster than interest
If the interest paid on your savings account does not keep up with the rate of inflation, the purchasing power of your savings will decrease over time. For example, if you buy a one-year, short-term CD at 2.5% but inflation increases from 2.3% to 4% within the year, there is no way for your investment to keep up — even with a higher earning rate.
6 standout banks with a high-rate savings or CD account
Putting your money in a savings account or a CD is almost always a better option than keeping your money at home. Savings accounts offer more flexibility and allow you to withdraw your money frequently with limited penalties. A CD often offers higher interest rates but limits access to your funds until the CD term expires.
Based on the data and findings from the MagnifyMoney study, where can one go to get savings account or CD rates that beat inflation? While the majority of banks and credit unions are not offering high-rate savings or CD accounts, here some financial institutions that stand out.
Savings account options that outperform inflation
If you are looking for a savings account that offers a high yield and flexible access to your money, here are options that may be right for you. Just be aware that income from bank accounts is taxable, so even if the headline rate is above inflation, your net return may be below inflation depending on your tax situation.
The High Yield Online Savings Account from Vio Bank carries a 1.75% APY for all balances. It takes just $100 to open this account and there’s no monthly fee, making Vio Bank an accessible and low-cost option to earn a savings rate this high.
Another high-yield account to consider is CIT Bank’s Savings Builder account. It offers a 1.75% APY on a tiered basis — savers can earn this high rate by either maintaining a balance of $25,000 or higher or depositing $100 or more into the account each month. It takes just $100 to open a Savings Builder account, and it has no maintenance fee.
One of the highest savings rates we could find is offered by Popular Direct, the online arm of Popular Bank. It offers a 2.55% APY on its Plus Savings Account, and interest compounds daily. You’ll need to deposit a minimum of $5,000 to open this account, and maintain a balance of $500 or more to get the $4 monthly service fee waived if you.
CDs options that outperform inflation
If you are looking to save your money in a CD and can agree to the terms, these three banks or credit unions are offering rates that outperform inflation.
PenFed Credit Union
For a one-year CD, PenFed Credit Union offers a 1.15% APY and requires just $1,000 to open a CD. This rate outperforms the inflation rate (2.3%) significantly.
Live Oak Bank
Next is another bank with high-rate CDs, Live Oak Bank. Its 12-month CD comes with an APY of 1.90% and requires a minimum opening deposit of $2,500.
Greenwood Credit Union
Greenwood Credit Union is offering a 12-month CD term with a 1.00% APY. The minimum opening deposit is $1,000.
Let’s look at a real-world example. If you were to deposit $10,000 in a one-year CD at Greenwood Credit Union with a 3.00% APY, you’d earn $300 after 12 months.
Based on the results of this study, there are very few (.4%) brick-and-mortar banks, online banks and credit unions that offer high-yield rates on savings accounts and CDs. In most cases, the inflation rate of 2.3% is higher than interest rates being offered. Based on the last year, the inflation rate has stayed above 2%, while savings account rates average only 0.26% and one-year CD rates average 1.04%, according to the MagnifyMoney study.
Still, some financial institutions offer rates that outperform the inflation rate. Check out all your options using the MagnifyMoney savings accounts marketplace. You can also check out some credit unions and online banks that offer high-yield rates for one-year CDs using MagnifyMoney’s CD rates comparison tool.
MagnifyMoney surveyed roughly 9,000 personal savings accounts and 6,000 one-year CDs of banks and credit unions available in the U.S. to determine the percentage of products with annual percentage rates that are greater than that of inflation, as measured by the September 2018 Consumer Price Index annualized rate of 2.3%. Banks were surveyed Oct. 30, 2018.