Savings simulator: Is your money beating inflation?
Walk past any bank and you’ll likely see savings rates advertised in the window.
That’s because, for the first time in many years, rates have climbed to 5% on some high-yield savings accounts. Much the same goes for other common financial products, like certificates of deposits (CDs) and money market funds, as the Federal Reserve has boosted interest rates to 20-year highs.
But there’s a catch.
“At the end of the day, there is no free lunch,” said Lauren Goodwin, economist and director of portfolio strategy at New York Life Investments. “If money market or cash-like yields are higher, it’s likely because inflation is higher.”
Last year, consumer prices jumped at rates unseen since the 1980s, swiftly eroding the purchasing power of each U.S. dollar. To attract and keep depositors in this environment, banks have been dangling juicier returns.
For example, a $1,000 investment in a typical “high-yield” savings account in January 2021 — when inflation started picking up — was paying just 0.7% in annual interest at the time, according to Investopedia data.
Then, as the Fed ratcheted rates higher to combat inflation, the rate on that same account surged to 5% by early 2023, delivering much more generous returns. As the interest compounded, that initial deposit would have grown to $1,059.72 as of this August, for a gain of $59.72 on paper.
But that’s before adjusting for inflation. In reality, that balance is worth only $902.86 in 2021 dollars — a $97.14 net loss in purchasing power.
Some investment strategies have done a better job cushioning the blow from inflation — or even beating it — than others. But as the track record of even a high-yield savings account shows, it hasn’t been easy. Try out our simulator to see for yourself. Just pick an initial investment value to explore how three common financial products’ returns compare with stashing cash under the mattress. Then hit “Apply Inflation” to see how those current-day balances look in 2021 dollars.