Can A Savings Account Protect From Inflation?

20 years ago, $250,000 seemed like a fortune. For many people, it would have been enough to buy a home outright and have money left over. Today, the average cost of a home in the U.S is almost double that amount, with 2021 at an average of $453,000. The reason for this is inflation, which causes money to have less buying power.

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While it may be most noticeable on the things we buy, inflation can also have a massive impact on our savings, potentially derailing your financial goals.

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Inflation Basics

While the term inflation is banded around on financial programs, the news, and even by consumer groups, many people don’t actually understand the fundamentals of “what is inflation?” In general terms, inflation is the rate at which the prices of goods and services increase.

This can be due to an increase in production costs for those goods or services or as a result of higher demand than the quantity of supply, which leads to price increases. In either scenario, as the prices increase, you will need to have more money to buy the items you used to buy for less.

In regards to savings, inflation will affect how much you will need to put away for any unexpected financial emergencies. If your expenses increase due to inflation, you’ll need to consider saving more to cover three to six months of living expenses in your emergency fund.

According to the latest statistics, inflation surpassed 8% in May 2022. This means that if you kept cash in an envelope or safe rather than depositing it into an interest earning account, it would have 8% less spending power due to inflation. For some context, the rate of inflation in April 2021 was 4%, so if the trend continues, inflation could have serious implications for your savings.

Don’t Tie Your Money Up For a Long Period

The first way to protect your savings from inflation is to avoid tying your money up for a long period. While the higher interest rates of long term savings plans may seem appealing, you need to think about the buying power of the cash when the term ends. You need to think strategically about where you put your savings and avoid plans where your money will be locked in for a long period.

Look At Short Term CDs

If you do want to access CD products, look at shorter term CDs or no penalty CDs. This will allow you to monitor the latest rates and if your CD starts to look unattractive, you can transfer your funds to a new short term CD.

You may want to consider setting up a CD ladder with terms of up to six months. This will create a rotating maturity, so you can regularly set up new CDs to access the latest, best rates.

Use A High Yield Account For Short Term Savings

You may want to have some funds that are readily accessible, but the average savings rate of 0.07% will not make a dent in protecting your funds from inflation. However, there are a number of financial institutions such as Discover bank or Capital one that offer high yield savings accounts, which earn above 0.60%.

Although this may not beat inflation, it will provide you with a greater return. Just be aware that many high yield savings accounts have some restrictions. You may be limited to a maximum number of withdrawals per month or you’ll incur an interest penalty. So, be sure to check the account terms and conditions to ensure that you fully understand any limitations before funding your account.

Top Up Your Savings

While this may not strictly protect your account from inflation, it will help your overall financial health. You should try to get into the habit of regularly checking your monthly expenses to see if there are areas where your spending can be trimmed, so you can funnel some extra cash into your savings account.

Although being too severe with your budget can be counterproductive, many of us can get a little lax with our financial discipline and need a reminder of how much we should be spending. So, rather than keeping your budget buried in a drawer, keep it handy and check how your spending compares to your budget, to see if there are areas where you’re overspending.

Max Out Your IRA Or 401K

If your savings focus is retirement, the best savings account is an IRA or 401K. You can take advantage of the tax benefits, just be sure to check the maximum allowable contributions for the current year.

Focus on Investments For Your Long Term Savings

If you’ve fully funded your short term savings, and you want to find ways to make your money work harder against rising inflation, consider investments. The average investment portfolio return in the U.S typically exceeds 10% annually, which could provide greater protection against inflation. While there are no guarantees about future earnings and you will need to consider the latest inflation figures, investments are still likely to be the best option for long term inflation beating returns.


While some savings accounts are index linked, so they will pay interest that tracks the current rate of inflation, they won’t necessarily keep up with other interest rates, so the overall returns may not be able to beat inflation.

Unfortunately, there is no bulletproof way to protect your savings from the effects of rising inflation. You will need to look carefully at the interest rates and which accounts offer the best strategies to minimize the impact of inflation.

Generally, basic cash savings accounts will not be the best place to leave your money, as the rates on offer are almost always lower than the rate of inflation. These accounts do have their uses if you need to have access to your funds, but if you are able to weather a delay, there are alternative savings products that can offer better rates to minimize the reduction in your buying power.

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