January 9, 2023 • Alisa Wolfson
Though inflation has cooled a bit, it still increased by 7.1% from November 2021 to November 2022. And that brings up one big question for many investors: Where exactly should you put money to — at least somewhat — stave off inflation? We asked certified financial planners and experts to share their thoughts:
High-yield savings account: Look for rates of 3%-4%
Even in times of high inflation, Americans need an emergency fund of somewhere between 3-12 months of essential expenses, pros say. The good news on that front: Many high-yield savings accounts are now paying more than they have in a decade with rates upwards of 3% (see the highest savings account rates you may get now here).
Look for a savings account that is FDIC-insured, notes Greg McBride, chief financial analyst at Bankrate. “Online savings account may not keep up with inflation, but the high-interest rates will minimize how much you fall behind,” adds says Ken Tumin, founder at DepositAccounts says.
Added bonus: “Rates on these types of accounts are typically variable, so they can potentially move higher if market interest rates continue to rise,” says David Edmisten, certified financial planner at Next Phase Financial Planning.
I-Bonds: Paying 6.89%
I-Bonds are government savings bonds that earn a combined fixed interest and variable inflation rate, adjusted semiannually. I-Bonds make the most sense for investors looking to protect themselves from inflation.
Short-term US Treasuries: May pay about 4%
If you want to save for short-term goals, these may be a good option now. Many short-term US Treasury yields are now in or near the 4% range. “Not a bad return for the short-term, and of course, they’re [virtually] risk-free returns,” says certified financial planner Bruce Primeau at Summit Wealth Advocates. Treasury Bills have a maturity of one year or less and are usually sold in denominations of $1,000.
TIPS (Treasury Inflation-Protected Securities): Paying a guaranteed 1.125%, plus principal increases by inflation
“TIPS can protect your future buying power, but hold them in a tax-advantaged retirement account due to the phantom income generated when inflation adjustments increase the bond’s face value,” says McBride. This phantom income arises when TIPS principal value is adjusted upwards because the IRS considers the change in value as income.
High-yield money market: Many are paying between 3.5% and 4%
High-yield money market accounts are currently paying between 3.5% and 4%, says certified financial planner Joe Favorito at Landmark Wealth Management. And while they’re similar to high-yield savings accounts, they offer the ability to write checks and pay bills directly from the account, unlike savings accounts. One caveat to consider: “These rates are not guaranteed and can reduce at the end of the promotional term. You also may be limited to a certain number of transactions per month into or out of the account. Additionally, you’ll pay state and federal income tax on the interest earned,” says Shawn Wilson at Integrated Financial Partners. (See the highest MMA account rates you may get now here).