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Personal Bank Accounts, CDs Pummeled by Inflation Over Last Year, While Some ETFs See Success

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Inflation is the (bad) word on everyone’s lips these days, as consumers shell out more money for everything from gas to groceries. But what about the money they’re keeping in interest-bearing accounts?

The latest MagnifyMoney study looks at personal and online savings, standard and reward checking, money market and certificate of deposit (CD) accounts — as well as the largest exchange-traded funds (ETFs) — to see how they fared during the 12 months ending March 31, 2022.

Spoiler alert: They didn’t fare well. Except for some ETFs, inflation beat the return in each case.

Key findings

  • Consumers are undeniably feeling the effects of inflation, starting with personal savings accounts. Americans who put $100 into one of these a year ago (April 1, 2021) would have lost the equivalent of $8.41 to inflation by March 31, 2022. This is due to a tiny 13 cents in compound interest and an 8.54% increase in the consumer price index — which tracks the changes in prices paid for goods and services — in that period.
  • Standard checking account holders lost the most, while rewards checking account holders lost the least — but still a lot. Money in standard checking accounts saw the biggest drop — $8.45 for every $100 deposited — while rewards checking had the best outcome among personal accounts at a still-bad loss of $7.11. However, consumers have lost more if they didn’t do what was required to waive fees.
  • Consumers who put their money in CDs fared about the same. Someone who rolled over a three-month CD four times would have lost 8.40% to inflation after one year. A six-month CD rolled over once and a one-year CD would have resulted in an average loss of 8.31% and 8.18%, respectively.
  • Adding money to ETFs would have been a better bet — in some cases. Analysts looked at the five largest ETFs at the start of the second quarter of 2021, and only one of them lost money in a year. But it lost a lot — the equivalent of $23.26 for each $100 invested after losses and expense ratios (fees). However, two ETFs based on the S&P 500 left investors with 4%-plus more, even after inflation and fees.
  • U.S. households spent an average of $61,334 in 2020, which means they would have needed $15,334 in an emergency fund to fully fund three months of expenses in early 2021. A household with that fund in a personal savings account would have to add $1,290 to cover the same expenses as of April 2022, or $1,239 if they’d used an online savings account. That amount increases by $430 or $413, respectively, to fund an additional month of spending.

Reward checking accounts fare best amid skyrocketing inflation, though best doesn’t imply success

Inflation is a big “bring me down” — and it’s bringing down the value of most financial accounts.

We looked at the average annual percentage yields (APYs) of various accounts, as reported by DepositAccounts. We wanted to see how much people would have lost, on average, to inflation in a year — from April 1, 2021, to March 31, 2022 — for every $100 they put into savings, checking or money market accounts (more on CDs and ETFs later).

The results weren’t encouraging. It sounds like a bad riddle — how can you lose money while saving it? — but it’s the sobering fiscal reality.

Our study found Americans who put $100 into a personal savings account on April 1, 2021, would have lost the equivalent of $8.41 to inflation by March 31, 2022. Why? Blame it on the small amount of compound interest earned (just 13 cents) and the 8.54% increase in the U.S. Bureau of Labor Statistics (BLS) consumer price index (CPI) — which tracks changes in prices paid for goods and services — during that period.

Money market accounts fared almost identically to personal savings accounts, with Americans who put $100 into one in April 2021 losing the equivalent of $8.40 to inflation by March 31, 2022. Those who put their money in online savings accounts fared somewhat better with 46 cents in earned interest per $100 in their account, but they still lost $8.08 after inflation.

Standard checking accounts fared even worse than ones for savings, with consumers losing $8.45 for every $100 they deposited in one. Rewards checking accounts had the best outcome among personal bank accounts, but that’s not saying a lot as they still lost $7.11 during that time frame for every $100 deposited.

Personal bank accounts: How much you would have after a year if you put $100 into one of these products (April 1, 2021, to March 31, 2022)
Nominal value after 1 yearNominal gain/loss from interest or priceSurplus/shortfall after inflationPurchase power gain/loss
Amount required to keep up with inflation$108.54
Reward checking$101.431.4%-$7.11-7.11%
Online savings account$100.460.5%-$8.08-8.08%
Money market$100.140.1%-$8.40-8.40%
Personal savings$100.130.1%-$8.41-8.41%
Standard checking$100.090.1%-$8.45-8.45%
Source: MagnifyMoney analysis of various sources. Note: Assumes no bank account fees or fees avoided through compliance with account terms.

What are consumers to do? MagnifyMoney executive editor Ismat Mangla says that the most important thing to consider is when you’ll need your funds.

“For cash that you will need to access in the next year, I still think a high-yield savings account insured by the FDIC (Federal Deposit Insurance Corp.) is the way to go,” she says. “Keep in your checking account just what you need over the next one or two months, and your emergency savings in a high-yield savings account. No, rates are not going to beat inflation, but there isn’t a safer option for money that you will need to access in the short term.”

Will inflation keep rising and eat those savings at even greater rates? There are no guarantees, but there’s some indication that inflation may be cooling — namely the most recent shift in the CPI, which increased just 0.3% in April.

That’s significantly less than the 1.2% increase seen in March, bringing the yearly change down to 8.3% from April 2021 to April 2022 — compared to the 8.54% increase from March 2021 to March 2022 that we used to make this study’s calculations.

Inflation means CDs faring similarly to bank accounts

Stashing your money in CDs — which are generally considered safe, conservative investments — hasn’t paid off either.

Someone who rolled over a three-month CD four times between March 2021 and March 2022 (meaning the money they originally invested in the CD was automatically invested in a new CD)  would have lost 8.40% to inflation. A six-month CD rolled over once and a one-year CD (no rollovers involved) would have resulted in average losses of 8.31% and 8.18%, respectively.

CDs: How much you would have after a year if you put $100 into one of these products (April 1, 2021, to March 31, 2022)
Nominal value after 1 yearNominal gain/loss from interest or priceSurplus/shortfall after inflationPurchase power gain/loss
Amount required to keep up with inflation$108.54
1-year CD$100.360.4%-$8.18-8.18%
6-month CD$100.230.2%-$8.31-8.31%
3-month CD$100.140.1%-$8.40-8.40%
Source: MagnifyMoney analysis of various sources. Note: Assumes 3- and 6-month CDs were immediately rolled over.

While CDs are still worth considering, according to Mangla, another better option right now may be inflation-adjusted savings bonds, known as I bonds. These 30-year bonds change interest rates every six months based on the CPI. Currently, I bonds are paying a composite rate of 9.62% — the highest in years.

“This could be a good option to park your medium-term cash because you can’t withdraw your money during the first 12 months of your purchase,” she says. “If you cash out during the first five years, you’ll forfeit three months of interest, which is still not bad. So I like I bonds for medium-term money because they really do help you beat inflation.”

If you choose to invest in a CD, be sure to look for the best interest rates. As we said, there’s some hope that inflation may be showing signs of slowing with the recent CPI dip, but a higher interest rate is the best bet to lessen its impact on your funds.

Adding money to ETFs puts consumers in better position — sometimes

ETFs have been the best performers recently … or at least some of them have.

Our researchers looked at Nasdaq return data for the same period — April 1, 2021, to March 31, 2022 — to see what would happen if someone put $100 in one of the five largest ETFs (funds that pool investors’ money across stocks, bonds and other investments) or the stock market in general based on the S&P 500 (generally used as a proxy for returns in the stock market as a whole, though individual portfolios vary widely).

What we found: Only one of them lost money in a year. It lost a lot, though — the equivalent of $23.26 for each $100 invested after losses and fees.

Two ETFs, however, netted a return of 4% or more, even after inflation and fees. The remaining two ETFs also increased the real value of investments by 0.21% and 2.52% in the same period.

ETFs: How much you would have after a year if you put $100 into one of these products (April 1, 2021, to March 31, 2022)
Nominal value after 1 yearNominal gain/loss from interest or priceSurplus/shortfall after inflationPurchase power gain/loss
Amount required to keep up with inflation$108.54
iShares Core S&P 500 ETF (IVV)$112.8012.8%$4.264.26%
Vanguard S&P 500 ETF (VOO)$112.7412.7%$4.204.20%
Standard & Poor's 500 index$112.7012.7%$4.164.16%
Financial Select Sector SPDR Fund (XLF)$111.0611.1%$2.522.52%
Vanguard Total Stock Market ETF (VTI)$108.758.8%$0.210.21%
iShares Core MSCI Emerging Markets ETF (IEMG)$85.28-14.7%-$23.26-23.26%
Source: MagnifyMoney analysis of various sources. Note: ETF returns are net of fund expense ratios.

Will they continue to pay off? Again, there are no guarantees, and it depends on which ETFs you choose. However, most industry experts say it’s going to be a tough year for equities across the board. In recent weeks, the S&P 500 has dipped so low — it’s down 8.37% over the last month as of May 17 — that some are predicting a bear market.

While ETFs are typically a good way to diversify investments, Mangla says they don’t come without risk.

“You’re putting your money in the market, so this is a good option for long-term funds, not cash you’ll need in the near future,” she says.

How inflation impacts maintaining emergency fund

One universal piece of financial advice experts preach is the importance of having an emergency fund equal to at least three months of living expenses. With inflation up and the value of savings accounts down, are emergency funds coming up short? Perhaps.

In 2020, Americans spent an average of $61,334 in 2020, which means they would have needed $15,334 in an emergency fund to fully fund three months of expenses in early 2021. A household that kept that fund in a personal savings account would have to add $1,290 to cover the same expenses as of April 2022, or an additional $1,239 if they used an online savings account. That amount increases by $430 or $413, respectively, to fund an additional month of spending.

Maintaining an emergency fund amid sky-high inflation
Implied loss from a savings accountImplied loss from an online savings account
Average annual expenditure in 2020$61,334
Emergency savings to cover 1 months of expenses$5,111$430$413
Emergency savings to cover 3 months of expenses$15,334$1,290$1,239
Emergency savings to cover 6 months of expenses$30,667$2,579$2,478

In March 2021, Americans had a total of $5.8 trillion of personal income that they didn’t spend on necessities or other consumer goods. They could have left that money in a checking account, put it into savings, invested in the stock market or otherwise invested it, but few moves paid off. While that number has plummeted ($1.2 billion in March 2022), consumers still have choices to make.

Their best bet for an emergency fund?

“I think the most important thing to consider is how much money you are keeping in the bank,” Mangla says. “You need to look at your own financial situation. Some people hoard cash in their checking and savings accounts because it makes them feel secure. So if you’re one of those people, take a step back and consider how much you actually need in short-term savings — and then make the rest work for you in options that will give you a better return.”

Methodology

Analysts used the average annual percentage yields (APYs) tracked monthly for different deposit accounts reported by DepositAccounts to calculate the compound interest earned by March 31, 2022, for a deposit made on April 1, 2021.

Similarly, using information provided by Nasdaq, analysts calculated the total returns for the five largest ETFs (as of March 2021) after subtracting expense ratios.

We then compared the change to the consumer price index (CPI) from the U.S. Bureau of Labor Statistics (BLS) for the same period to determine how much purchasing power was lost or gained.

Household spending data is from the BLS’ 2020 Consumer Expenditures Surveys.