Inflation-proof your savings
You can’t control the rising cost of living - but you can counter its effects.You can’t control the rising cost of living - but you can counter its effects.
The annual inflation rate is 0.0%1 according to the Bureau of Labor Statistics and not likely to rise significantly in the short term. But it would be a mistake to attach too much importance to that that figure - or to take it as reassurance that the cost of living will remain where it is indefinitely.
For one thing, the terms "inflation" and "cost of living" are not interchangeable. While the inflation rate serves as a broad indicator of increases in the cost of goods and services, the Cost of Living Index provides a more meaningful – and less rosy - picture for individuals.
What it shows is that even in today's low-inflation environment, consumers are facing steep increases in specific categories, such as prescription drugs, groceries, apartment rents and college tuition, among others. What's more, wage growth has slowed significantly over the past several years, making it even more difficult to keep up with rising costs.
Protecting what you've built
Whether your main focus is on inflation or the cost of living, the most noticeable effect is a gradual erosion of purchasing power.
To preserve your money's real value, you need to grow it at a rate that at least stays even with inflation and, more specifically, with the cost of living.
Many people pursue that objective through investing. But keeping a portion of your savings in depository accounts such as savings accounts and Certificates of Deposit (CDs) can provide a bulwark against unexpected emergencies and the loss of purchasing power.
In deciding what type of savings products are right for you, consider these questions:
- What's the best interest rate I can get? Before opening an account, make sure it pays an interest rate that equals or exceeds the rate of inflation. Not all savings accounts do. If you need 24/7 access to your funds, your best choice is a CIT Bank High Yield Savings account, which allows unlimited penalty-free withdrawals and pays above-average rates.
- How often is the interest compounded? Identical interest rates will yield different returns depending on how often the interest is compounded. For example, if the interest is compounded daily – as it is in a CIT High Yield Savings or CD account – your money will grow faster and provide greater anti-inflation protection than if the interest were applied once a year.
- How important is liquidity to me? If you're comfortable giving up access to your money for a set period, consider purchasing a CD, which generally pays higher rates than savings accounts. As a rule, the longer the term of the CD, the better the rate, so you'll need to decide if you can afford to set the money aside for one, three, or five years.
- Will I lose out if I purchase a CD and interest rates rise? You won't lose out if you purchase a CD from our RampUp™ CD family. CIT Bank's RampUp™ CDs allow you to raise your rate once during your term if rates go up; our RampUp™ Plus CDs let you also increase your deposit once during your term. Either way, you can rest easy knowing that your money is growing faster than inflation.
- Is it possible to lock in the higher interest rates of CDs without completely giving up liquidity? You can combine higher rates and flexibility by using the strategy known as CD laddering. This involves buying several CDs and staggering the terms. In that way, you'll have access to part of your money at scheduled intervals while growing your money faster than inflation. Learn more about CD laddering.
Will my savings be insured?
While investments offer the potential for higher returns, they are not insured by the Federal Deposit Insurance Corporation. In contrast, depository accounts at most major U.S. savings institutions, including CIT Bank, carry $250,000 in FDIC insurance per account ownership category per bank.
Inflation is one of those inevitable frustrations, like snowstorms, traffic jams, and flight delays, that can't be controlled. But you can take steps now to make sure inflation doesn't weaken your purchasing power – and deflate your dreams.
1 As of 10/15/2015
This information is made available to you as a self-help tool for your independent use and is not intended to provide investment advice. We cannot and do not guarantee its accuracy and applicability to your individual circumstances. All examples are hypothetical and are for illustrative purposes. Please consult with a financial advisor for a solution suitable for your needs.