Should You Be Saving Money Right Now?
The past year has been challenging for both investors and savers, as finding a safe place to park cash in the midst of inflation and market corrections has been difficult.
However, as the Fed raises its federal funds rate, bond yields and interest rates paid on money market and savings accounts tend to rise, offering the potential to earn a real return on these low-risk assets.
High-yield savings and money market accounts are now offering between 3.3% to 4.3%, which is a decent rate of return for a low-risk asset, although the nominal yield does not factor in inflation. To truly determine whether these assets are a good investment, investors need to look at the real rate of return or the inflation-adjusted returns. Currently, inflation is at a 6.5% year-over-year growth rate, which may make real returns on bonds and savings rates appear negative.
However, when looking at the month-over-month Consumer Price Index (CPI) increases, which give us a better idea of what has happened recently and clearly shows a cooling of inflation, we can see a decline of 0.1% in monthly inflation, indicating that inflation is starting to cool down. Assuming a flat monthly pace going forward, at the end of 2023, we'll see a year-over-year inflation rate of around 1.9%. This means that investors can still earn a real return of about 1.7% if they put their money in a high-yield savings account.
For the first time in over a year, investors have a safe place to park cash where they can at least preserve their spending power, if not modestly grow. This is crucially important in a complex market like the one we're in. Having a solid place to park cash gives investors the ability to earn a real return while looking for the right long-term investments.
It's important to note that not all savings accounts are the same. The biggest banks in the U.S., like Chase, offer pathetic interest rates, which are not favorable for savers. Nevertheless, investing in high-yield savings or money market accounts is an important strategic consideration for investors. By holding some dry powder in a high-yield account and being opportunistic with real estate investments, investors can wait for the best opportunities without losing spending power.
Saving money right now makes more sense than it did a few months ago, and with a little bit of patience and diligence, investors can find the right investments to grow their wealth.
