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How to Beat Inflation

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Inflation is the general upward movement of the price of goods and services in an economy. With inflation, everything from a gallon of milk to a gallon of gas costs more tomorrow than it does today — and it gradually erodes the purchasing power of your savings.

Beating inflation isn’t hard, but you need a strategy in place to do the job. Currently, the annual rate of inflation is 2.1%, according to the latest Consumer Price Index (CPI). At time of writing, the national rate for a savings account held at a deposit institution is 0.09% APY, while the average return on certificates of deposit (CDs) is around .13% to .98%, according to the FDIC. Let’s take a look at the tools you’ll need to beat inflation.

Strategies to beat inflation

“The best inflation hedges are actually buying assets which might increase in value with inflation,” said David J. Haas, a certified financial planner with Cereus Financial Advisors in Franklin Lakes, N.J. This means buying things today that will increase in value at a rate that is equal to or higher than the rate of inflation.

Invest in the stock market to beat inflation

The stock market is an excellent long-term inflation hedge, according to Haas. Investment products like individual stocks, exchange traded funds (ETFs), and mutual funds, have the potential to outearn inflation.

“When you own stock, you own part of a corporation which has price-setting power. That means corporate book-value as well as revenues rise with inflation,” said Haas.

The broad stock market over the long-term has provided average annual returns of 6% to 7% above the rate of inflation, said certified financial planner Randy Bruns, founder of Model Wealth in Naperville, Ill.

“Diversified portfolios of stocks and bonds have earned inflation-adjusted (or real) returns of between 3% and 6% over the long-term, depending on the makeup of the portfolio,” said Bruns.

What about stock market volatility?

Financial planners caution that investors must consider that market volatility can affect your return.

“In years like 2019, a portfolio of stocks beat inflation by double digits, but that won’t persist as a long-term average,” said Bruns. “Nor should major stock market losses ultimately change your ability to outpace inflation over many years. It’s reasonable to begin with an assumption that your portfolio might earn historical inflation-adjusted returns of 3% to 6%, but to then reduce those returns by a percentage point or two to be conservative.”

Beat inflation by investing in bonds

Another inflation-beating option is bonds, loans where you give a government or a corporation your money, in exchange for a promised return over time. But the type you purchase is vital — bond prices and interest rates typically move in opposite directions, and during high-inflation periods, interest rates rise which means bond rates decline.

“The entity pays you back over time, but inflation erodes the value of the currency being paid back,” said Haas. “So bonds are typically a poor investment in inflationary times. You are being paid back something which is less valuable than what you loaned out.”

Bonds diversify your investments

However, purchasing some types of bonds to diversify your investments can be a smart overall strategy. For example, short-term bonds, which mature in one to four years, can do well in an economy where the interest rate is rising.

Longer term bonds, however, offer a trickier scenario as investors can’t accurately predict the change in interest rates and inflation over a longer time period. Higher inflation can reduce the value of payments, causing bond prices to fall.

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) are bonds that are designed to do well during inflationary periods. The government-backed bond was introduced in 1997, and offer an adjustable principal that’s linked to the CPI. As inflation rises or falls, the value of the investment adjusts with it.

Investors can also purchase bond funds, which are similar to mutual funds but are invested in bonds instead of stocks. Managers of bond funds often buy and sell according to market conditions, and investors receive monthly income payments, which may vary from month to month.

“Investing in high quality bonds — through a broad market bond index fund, for example — has historically provided average annualized returns of 2% to 3% over inflation,” said Bruns.

Buy annuities to beat inflation

Annuities are complex investment contracts typically offered by insurance companies to provide investors with an income stream for retirement. While they can be another answer on how to beat inflation, you have to choose wisely. Some annuity products pay the investor a fixed monthly income that isn’t adjusted for inflation, but others have features designed to address inflation head-on.

One tool is a cost-of-living adjustment (COLA) rider that will increase your annuity income payment by a percentage you choose. For example, if you choose 3%, which is higher than the current rate of inflation, your monthly payments will grow by 3% every year. The average inflation rate, tracked since 1913, is 3.1%.

Another feature is a CPI-rider that automatically adjusts your monthly payment based on the current rate of inflation. During times of high inflation, your income payment will go up and when inflation is stagnant, your payments will stay the same.

Build a CD ladder

While the average CD rate won’t help you beat inflation, building a CD ladder can help you meet or beat the inflation challenge. A CD ladder is a portfolio of CDs with staggered certificate terms to take advantage of higher APYs offered by some banks and credit unions.

You start by purchasing CDs once a month or every few months to lock in rising rates, with the newest CD likely earning the highest rate. With a CD ladder, each certificate will complete its term at regular intervals, giving you steady access to cash at higher rates than you would receive in a regular savings or checking account.

Once interest rates start to stabilize, you can consider holding CDs for longer terms. While owning CDs can be a safer approach than some of the market-tied investments, in higher inflationary periods, your CD may simply match the current rate of inflation instead of beating it.

“CD ladders are a great idea for those assets folks would like to keep FDIC insured,” said certified financial planner Dennis R. Nolte, vice president of Seacoast Investment Services in Oviedo, Fla.

Real estate can help you beat inflation

As inflation rises, investing in real estate can become an attractive option for beating inflation. When interest rates are low, the cost of getting a mortgage is often lower, as well. Low inflation generally brings down mortgage rates, which will reduce your payment, making it more affordable to buy a home.

Inflation can reduce the value of your debt because it reduces the value of money. Purchasing real estate by incurring debt allows you to realize the benefit of the money when it could go farther. As long as your wages keep up with the pace of inflation, you will pay back the loan with an interest rate that is effectively lower thanks to inflation.

“Real estate can be a good inflation hedge because it has value which may increase with inflation,” said Haas.

However, inflation can negatively affect housing prices, causing them to fall in the short term. Real estate should be considered a long-term investment, added certified financial planner Jon L. Ten Haagen with Ten Haagen Financial Group in Huntington, N.Y.

“Real estate, if it is an open-ended position, could be a good investment if you have the time horizon,” he said. “Time is your friend when investing.”

Delay claiming social security benefits

If you’re nearing the age of retirement, delaying your Social Security retirement benefits can help you beat inflation. You earn an 8% increase in your benefit amount each year you wait to collect, up to age 70. If you retire at 65, for example, you have the potential of increasing your monthly benefit check by as much as 40%.

“Social Security provides at least some ability to offset inflation, though increases in Medicare-related costs often chip into annual increases,” said Sean M. Pearson, certified financial planner with Ameriprise Financial Services in Conshohocken, Pa. “The longer you can wait to collect Social Security, the more protection you will have against inflation during retirement.”

If you collect Social Security before age 70, your future cost-of-living increases will be based on a lower monthly amount. For most people, the difference in collecting Social Security at age 62 means earning less than half as much than if that same person waits until age 70.

If you’re married, you can adopt strategies to make the most of your benefits. For example, the higher-earning spouse might delay benefits until age 70, while the younger spouse could collect payments sooner to create income.

“Beating inflation is typically a long-term mindset, as in saving for retirement,” said Bruns. “An inflation-beating investment matters because the more you can outpace the rising cost of your retirement, the less you’ll have to contribute out of pocket.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here

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Banking

Best Savings Accounts for Kids

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Piggy banks are fun for small change, but if you want to teach your kids important lessons about managing money and the power of compound interest, get them their own savings account. While your local bank branch probably offers more than one savings account product, you might consider looking online for one that’s designed with children in mind.

To aid in your search, we have chosen six savings accounts tailored for kids from a selection of nearly 100 kids’ savings options offered at banks and credit unions around the country. We based our selections on how well they met these five criteria:

  • Competitive annual percentage yield (APY): Accounts should demonstrate the rewards you can get by saving your money, and a competitive interest rate helps achieve that objective.
  • Low fees: Kids don’t need to lose their money to fees, so finding an account with zero fees was important.
  • Low minimum deposits: Most kids don’t have a large amount of money to save when they first open an account. Having a low minimum deposit requirement can help them get started quicker.
  • Broad geographical reach: Banks and credit unions need to be available to a large geographic market, with extra points for physical locations where kids can go and deposit cash and coins.
  • Great educational tools: Savings accounts that are geared to kids should have some educational tools to help them learn about what it takes to achieve financial success. Bonus points if the tools are fun, too.

 

Best overall savings account for kids: Capital One

Kids Savings Account from Capital One Capital One’s Kids Savings Account has all of the features you’d expect to see in a savings account for adults but with the additional feature of parental controls, which makes it a great overall solution for kids of all ages. The account earns 0.60% APY, has no monthly fees and can be opened with $0. You can set it up the account, and make your initial deposit at a later date.

The Kids Savings Account parental controls allows parents to sign into the account under their own usernames and passwords to help their children manage their funds. Parents always control transfers in and out of the account, offering good balance between independence for the young holder and parental oversight. Kids get to view their balance and watch their money grow.

Capital One lets you create an automatic savings plan linked with other accounts, so you can automatically transfer your child’s allowance into their Kids Savings Account. When it comes to geographical reach, Capital One has approximately 500 branch locations, as well as a great mobile banking app, which allows you to deposit checks and check balances.

Capital One Kids Savings Account
APY: 0.60%
Monthly Fees: $0
Minimum Opening Balance: $0

LEARN MORE Secured

on Capital One’s secure website

Member FDIC

Best savings account for college savings: Citizens Bank

CollegeSaver from Citizens Bank (RI) If you want to be rewarded for consistent savings, the Citizens Bank CollegeSaver account has a bonus you might consider. If you open the account before your child is six and make a deposit of at least $25 each month until your child turns 18, Citizens Bank will give you a $1,000 bonus (the current account APY is a low 0.05%). You can also open this account if your child is between 6 and 12 years of age, but the minimum monthly deposit will be $50 and opening deposit is $500.

If you were to open the account today with an initial deposit of $25 upon the birth of a child (and assume the current APY held for 18 years), and then deposit $25 a month for 18 years, your $5,400 investment would accrue $24.48 in interest. Add the bonus and you’ll end up with $6,449.48. The bank doesn’t put any stipulations on how the money can be spent, so you can use the balance for college or any other financial needs.

Citizens Bank CollegeSaver
APY: 0.05%
Monthly Fees: $0
Minimum Opening Balance: $25 for children under six years old; $500 for children age six to 12

LEARN MORE Secured

on Citizens Bank (RI)’s secure website

Member FDIC

Best savings account for a young child: PNC Bank

S is for Savings from PNC Bank If you want to engage your child with educational tools, PNC’s S is for Savings account offers a lot. Granted, this account offers the lowest APY of the banks that made this list, but it makes up for it with its interactive online banking experience.

The Learning Center features Sesame Street characters that will help them learn basic money concepts. The site has fun activities you and your child can do together.

Features include the ability to set up automatic savings deposits that help them see the benefits of having a savings routine. Kids can work towards goals and learn about the three components of money: saving, sharing and spending. As your child gets older, you may choose to transfer their accumulated balance to a savings account at a bank that offers a higher interest rate.

PNC Bank’s S is for Savings
APY: 0.01%
Monthly Fees: $0 for account holders under 18
Minimum Opening Balance: $25

LEARN MORE 

Member FDIC

Best savings account for teens: Alliant Credit Union

Kids Savings Account from Alliant Credit Union When your child turns 13, Alliant Credit Union considers them to be a young adult, offering their High-Rate Savings Account with a 1.65% APY and no monthly fees. For teens who want to set savings goals, the credit union allows them to set up supplemental accounts that can be earmarked for specific items, such as saving for a new car.

What makes this a great option for a teen is that Alliant also offers an interest-paying teen checking account for kids ages 13-17. The checking account earns an APY of 0.50%. The two accounts can be linked and both will earn your teen interest. Alliant also refunds up to $20 per month in ATM fees if the teen uses out-of-network machines.

To open an account at Alliant Credit Union, you must be a member. Membership is open to employees or former employees of partner businesses or organizations. Or you can join by making a $10 donation to the Foster Care to Success Foundation.

Alliant Credit Union High-Rate Savings:
APY: 1.65%
Monthly Fees: $0
Minimum Opening Balance: $5

LEARN MORE Secured

on Alliant Credit Union’s secure website

NCUA Insured

Best APY for a kid’s savings account: Spectrum Credit Union

MySavings from Spectrum Credit Union Spectrum Credit Union currently offers the highest interest rate on the market for a kid’s savings account, but only on a relatively limited balance. Spectrum’s MySavings account earns 7.00% APY on account balances up to $1,000, making for a rate that’s higher than many CDs. Balances over $1,000 earn the regular savings rate, which is 0.50%. A high interest rate can help get kids excited about savings as their balance will grow quicker.

Spectrum Credit Union currently has branches in six states, but deposits can be made nationwide through the Credit Union CO-OP Shared Network. Membership is open to anyone by joining the Contra Costa County Historical Society ($15 membership fee) or the Navy League of the United States ($25 annual membership fee).

Spectrum Credit Union MySavings
APY: 7.00% for the first $1,000; 0.50% on balances above $1,000
Monthly Fees: $0 for account holders under 18
Minimum Opening Balance: $0

LEARN MORE Secured

on Spectrum Credit Union’s secure website

NCUA Insured

Best online tools for a kid’s savings account: Capital One

Kids Savings Account from Capital One Kids are digital natives, and that makes a kid’s savings account’s online banking features extra important. In addition to being our pick for best overall savings account for kids, the Capital One Kids Savings Account offers a great selection of online saving and budgeting tools that will keep kids engaged and informed.

One of the best features is the ability to create additional savings accounts and set a target goal for each account. For example, you child may set a goal for holiday gifts, another goal for a new bike or car and another goal for vacation money. They can even give each account a nickname, such as “My Wheels Fund.”

Capital One has a full suite of online tools for your child to track their progress and success, helping to keep them focused on their goals. Capital One also offers standard features on its mobile banking app, some of which are available for kids, including the ability to check their balance or make a mobile deposit.

Capital One Kids Savings Account
APY: 0.60%
Monthly Fees: $0
Minimum Balance: $0

LEARN MORE Secured

on Capital One’s secure website

Member FDIC

Why your kid should have a savings account

It’s never too early to start teaching your kids about money, and a savings account is a great tool to help accomplish this aim. According to the 9th Annual Parents, Kids & Money Survey by T. Rowe Price, 55% of parents said their child has a savings account, but just 23% of kids said that they talk to their parents frequently about money. Parents who discuss financial topics with their kids at least once a week are more likely to have kids who say they are smart about money than than those who do not have a discussion with their children.

Savings accounts show kids the value of saving at an early age. They get to watch their money grow as compound interest work its magic, and they can set short- and long-term goals for the money they save. The reward of achieving the goals will teach life lessons on patience and planning. Once you open an account for your kids, share money management tips with them, things like “paying yourself first” by saving a portion of gifts and allowances they receive instead of spending it all.

When you teach your child good money habits early on, you help set them up for success later in life. Putting your child on the path for financial responsibility and independence by choosing the best savings account for kids could be the greatest gift you can give them.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here

Advertiser Disclosure

Banking

Credit Unions vs Banks: What’s the Difference?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Credit unions and banks are similar financial institutions, although there are key differences between them. Both banks and credit unions offer financial services like checking accounts, savings accounts, and certificates of deposit (CDs). They both offer mortgages and personal loans. But banks are for-profit companies, while credit unions are nonprofit institutions that serve their members and their communities. Read on to discover more about the differences between banks and credit unions.

What is a credit union?

A credit union is a not-for-profit financial institution that is formed by another entity, such as a corporation or community group. Ranging in size from small local operations to large nationwide networks, credit unions are owned and controlled by their members, who are also their customers.

Under the credit union business model, members buy shares in their credit union, and their deposits are used to provide loans and other financial products to each other.

A credit unions is run by a volunteer board of directors that is elected by its members. Credit unions are chartered by the National Credit Union Administration (NCUA) or by a state or federal government.

Credit Unions are growing in popularity: The assets of the average credit union have increased from $150 million to $260 million since 2012. Average membership at credit unions nationwide have grown by more than 20% since 2012.

How is a credit union different from a bank?

One of the chief differences between banks and credit unions is their ownership structures. Credit unions are owned by their members, while banks are owned by their stockholders. These different ownership structures dictate how these institutions operate. Credit unions serve the best interest of their members, while banks have a fiduciary duty to their shareholders, not their customers.

Credit unions and banks dispose of their profits differently. As for-profit institutions, banks redistribute their earnings to investors and shareholders. Credit unions use their earnings to reward their members by giving them dividends, discounted loan rates, higher interest rates on savings and investment products, and lower-cost services.

Unlike a bank, not everyone can open an account at a credit union. To join, you must meet certain criteria, which is often dependent on your employer, family, geographic location or membership in a group, such as a professional organization, school, church or labor union.

Finally, customer service can be another difference between credit unions and banks. Bank rules and policies are set by their boards of directors, who are often located in another city. Credit unions, on the other hand, are run by members, who are likely living in the community. In studies, credit unions often rank higher than most banks in terms of their quality of customer experience.

Feature

Credit Union

Bank

Management

Controlled by its members

Controlled by board of directors

Purpose

Serve its members

Make a profit

Revenue

Returned to members through dividends

Distributed to shareholders

Account holder rights

Account holders have voting rights

Account holders have no voting rights

Service

Account holders are members who can help set policies by voting

Account holders have no say in policies

Eligibility

Must meet eligibility requirements to open an account

Anyone can open an account

How to join a credit union

Finding a credit union near you is as easy as an internet search. You may be surprised at the number of credit unions in your area. The NCUA has a Credit Union Locator that can help you find a credit union near you. You can search by your address, the name of the credit union or by its charter number, which is a unique number assigned to the credit union by NCUA.

See if you are eligible

After you locate credit unions in your community, visit their website to learn about their eligibility requirements for membership. If the credit union does not include this information on its website, call or visit its physical location for more details.

In general, anyone who belongs to a certain community or organization may join the community’s credit union. Members typically share a common bond, such as

  • They work for the same employer
  • They live or work in the same geographic area
  • They have a family member who is a member of the credit union
  • They belong to the same organization, such as a religious group, school, labor union or homeowners association

Some credit unions are open to anyone and will approve membership based on charitable contributions. For example, you can join Alliant Credit Union by making a $10 donation to the Foster Care to Success Foundation.

Open an account

If you meet a credit union’s membership requirements, you can open an account by submitting proof of your identity, residence address and proof of eligibility. Then make the minimum deposit, which for credit unions will range from $5 to $25.

Is my money safe in a credit union?

In terms of safety, there really is no difference between depositing money with a credit union and depositing it with a bank, as long as the credit union is a member of the NCUA. The NCUA Insurance Fund provides members of federally-insured credit unions with a maximum up to the legal limit in insurance coverage, which is the same coverage the FDIC offers to bank account holders.

If you have more than one type of account ownership, such as individual accounts, joint accounts, revocable trust accounts and certain types of retirement accounts, it’s possible to qualify for more than the insurance limit in coverage.

Advantages of credit unions

  • Better interest rates: Because credit unions are not-for-profit organizations, they boast competitive rates and fees for their members, unlike commercial banks. Credit union members typically enjoy higher interest rates on their deposit accounts, as well as more affordable loan products.
  • Lower fees: According to the Credit Union National Association (CUNA), credit union members on average can save $102 every year versus banking with commercial banks. For example, credit unions charge about $3 less on average for each non-sufficient fund in a checking account than banks do, and almost $10 less for late payments on credit card debt.
  • Decreased closing costs: In terms of mortgage closing costs, people who use credit unions for loans pay $210 less than those who take out loans from banks.
  • Capped credit card rates: Credit unions have an 18% cap on how much interest they can charge on loans including credit cards, which distinguishes them greatly from traditional bank credit card issuers. Credit unions charged an average 11.82% interest rate on credit card debt; whereas commercial banks charged 13.65%.
  • Personalized loan reviews: If you’re building your credit and want to use a personal loan to establish or improve your credit score, a credit union may be more likely to work with you than a big bank. Members of credit unions may also be able to appeal credit decisions if they’re turned down.
  • A voice and vote: Your deposit in a credit union makes you a part of the ownership of the institution. Interestingly, in this structure, one person’s loan may come from another’s deposit. It also gives you the right to vote.
  • Access to nationwide ATM networks: If you are a member with a credit union, you have access to a national network called CO-OP, which has over 28,000 ATMs across the country and allows anyone who belongs to a credit union to access funds without a charge. This is more than what Chase has (around 16,000).

Disadvantages of credit unions

  • Limited access to branches: While some credit unions work hard to offer the same conveniences as banks, their branch locations are limited compared with megabanks. And you won’t likely find your credit union branch when you travel to another country.
  • Slower to adopt new technologies: Assets of some small local credit unions are often a fraction of those of big national banks. Some don’t even have their own website. They may also struggle to afford higher costs of adopting the new mobile banking technology, which can limit the need to visit a physical branch or ATM location.
  • Fees aren’t always lower: While some fees may be lower at credit unions, that doesn’t mean you can always save money in fees with a credit union. For instance, Chicago-based Alliant Credit Union charges an outgoing wire transfer fee — $50 for international and $25 for domestic. However, Chase Bank, which is also available in Chicago, doesn’t charge an outgoing wire fee for checking account holders.

Credit union vs bank: Which should you choose?

Choosing between a bank and credit union comes down to personal preference. Identify the services and banking experience that matter most to you. Consider things like customer service, online tools, branch location, interest rates and loan requirements. Make a checklist of the features in a financial institution that are most important to you.

Ultimately, it comes down to comparing products, services, fees and convenience. Remember, you can have accounts at a bank and a credit union. In some cases, this may be the best way to determine the right fit for you, allowing you to enjoy the best of both worlds.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Stephanie Vozza
Stephanie Vozza |

Stephanie Vozza is a writer at MagnifyMoney. You can email Stephanie here