Inflation is the general increase in the prices of goods and services over time. It reduces the purchasing power of your money, meaning you can buy less with the same amount of cash. This can have a significant impact on your savings and CDs, especially if the inflation rate is higher than the interest rate you earn.
What is the inflation rate in 2023?
According to the latest data from the Ministry of Statistics and Programme Implementation (MOSPI), the retail inflation rate in India, measured by the Consumer Price Index (CPI), jumped to 7.44% in July 2023, the highest since April 2022. This was mainly driven by a surge in food prices, which rose by 11.51%, the highest since January 2020. The wholesale inflation rate, measured by the Wholesale Price Index (WPI), remained in negative territory for the fourth consecutive month at -1.36% in July 2023, indicating a deflationary trend in the economy.
The Reserve Bank of India (RBI) targets inflation at 2-6% but aims to bring it to the mid-point of 4%. July marks the first month since March that inflation stays above the upper limit of the central bank’s target range, as irregular monsoon patterns across the country led to a spike in food prices.
How does inflation affect your savings and CDs?
Savings accounts and CDs are popular ways to save money and earn interest. However, if the inflation rate is higher than the interest rate you earn, your real return will be negative. This means that your money will lose value over time, as it will not be able to keep up with the rising cost of living.
For example, if you have ₹100,000 in a savings account that pays 5% interest per year, you will have ₹105,000 after one year. However, if the inflation rate is 7%, your ₹105,000 will only be worth ₹98,130 in terms of purchasing power. This means that you have effectively lost ₹1,870 in real terms.
To avoid this scenario, you need to find savings accounts and CDs that offer interest rates that are higher than or equal to the inflation rate. This way, you can preserve or increase the value of your money over time.
Where can you find high-interest savings accounts and CDs?
The average national savings rate in India is a meager 0.43%, while the average CD rate is around 4.5% to 5% or higher, depending on the lender and other factors. However, there are some banks and credit unions that offer much higher rates for both savings accounts and CDs.
For instance, Betterment Cash Reserve offers a whopping 5.50% APY for new customers and 4.75% APY for existing customers until December 31, 2023. BluPeak Credit Union offers a 5.33% APY for its Preferred Savings Account, which only requires a minimum deposit of ₹25 and is only available to new members. CloudBank offers a 5.26% APY for its 24/7 Savings Account, powered by Raisin, which only requires a minimum deposit of ₹1.
For CDs, some of the best rates are offered by credit unions rather than banks. For example, Navy Federal Credit Union offers a 6% APY for its 12-month Special EasyStart Certificate, which has a maximum balance of ₹100,000 and requires a monthly deposit of at least ₹50. Patelco Credit Union offers a 5.75% APY for its 60-month CD Plus Certificate, which has a minimum deposit of ₹1,000 and allows one penalty-free withdrawal during the term.
These are just some examples of high-interest savings accounts and CDs that you can find online or in your local area. You can compare different options using online tools such as Bankrate or NerdWallet to find the best deal for your needs.
How to choose the best savings account or CD for you?
While interest rates are an important factor to consider when choosing a savings account or CD, they are not the only one. You also need to take into account other aspects such as fees, minimum deposits, withdrawal limits, maturity periods, penalties, and insurance coverage.
For savings accounts, you should look for ones that have no monthly maintenance fees or minimum balance requirements. You should also check how often you can withdraw money from your account without paying any charges or losing interest. Some savings accounts may also offer additional benefits such as ATM access, online banking, mobile check deposit, or cashback rewards.
For CDs, you should look for ones that have low or no early withdrawal penalties in case you need to access your money before the term ends. You should also check how often you can add money to your CD or withdraw interest without affecting your principal balance. Some CDs may also offer features such as rate bumps, loyalty bonuses, or flexible terms.
Finally, you should make sure that your savings account or CD is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) or the National Credit Union Administration (NCUA) in case the bank or credit union fails. The DICGC covers up to ₹5 lakh per depositor per bank, while the NCUA covers up to $250,000 per depositor per credit union.
Inflation is the general increase in the prices of goods and services over time. It reduces the purchasing power of your money, meaning you can buy less with the same amount of cash. This can have a significant impact on your savings and CDs, especially if the inflation rate is higher than the interest rate you earn.
To avoid losing money in real terms, you need to find savings accounts and CDs that offer interest rates that are higher than or equal to the inflation rate. This way, you can preserve or increase the value of your money over time.
There are some banks and credit unions that offer much higher rates for both savings accounts and CDs than the national average. You can compare different options using online tools such as Bankrate or NerdWallet to find the best deal for your needs.
You also need to take into account other aspects such as fees, minimum deposits, withdrawal limits, maturity periods, penalties, and insurance coverage when choosing a savings account or CD. You should look for ones that have no or low fees, flexible terms, and insurance protection.