Don’t Lose Money: Why A Standard Savings Account Loses Money to Inflation

Keeping your money in the bank is safe. The bank won’t lose your money, so it will always be there! While the bank technically won't lose your money, the old wisdom is dead wrong.

Let me explain why a standard savings account loses money to inflation every single year. In my previous post, I talked about how inflation drains your financial bucket roughly 3% per year.

That number may seem trivial until you actually see how it affects your finances. If you haven’t done so already, do the calculations I showed you. Be sure to look at 10, 20, or 30 years down the road.

While it’s true the bank might not lose your money in terms of dollar amount, your money’s purchasing power decreases about 3% each year. This is the same as having 3% less money each year. In essence, you are losing money.

If you only have a regular savings or checking account with a traditional bank, you are guaranteed to lose money. Traditional big banks such as Bank of America, Wells Fargo, or Chase do not offer inflation-beating interest rates. As of this writing, a standard savings account at any of those three pays a 0.01% annual percentage yield (APY). That’s one hundredth of a percent! Far less than inflation’s 3% average rate.

Just how bad is 0.01% APY? Let’s see how much $10,000 in a savings account paying 0.01% APY earns.

After one year, that $10,000 will earn…

…wait for it…

…one whole dollar!

That’s right. You earn a measly $1. Time to celebrate with a knock-off brand soda at the dollar store! You’ll still need to find some change to pay the sales tax, though.

Meanwhile, inflation has reduced the purchasing power of your $10,000 to $9,709 after a year. This is why a standard savings account is a guaranteed way to lose money to inflation—your money loses purchasing power.

But as bad as that is, keeping money in a checking account is even worse. Most checking accounts pay zero interest. And if they do pay interest, it’s usually less than savings accounts.

AN HYSA SLOWS THE DRAIN ON YOUR FINANCIAL BUCKET

Unless your money is growing at least 3% annually, it’s not even keeping up with inflation. Ideally, it's growing much faster than that.

Does that mean savings and checking accounts are meaningless? Of course not. Checking accounts have their uses, and it’s good to have an emergency fund in a savings account for easy access. That said, perhaps consider a high-yield savings account as part of your financial plan.

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WHAT IS A HIGH-YIELD SAVINGS ACCOUNT (HYSA)?

A high-yield savings account (HYSA), true to its name, is simply a savings account that pays a higher APY. As of this writing, many HYSAs are paying about 4% APY.

With a 4% APY, $10,000 will earn $400 after one year. This is not only much higher than what Bank of America, Wells Fargo, and Chase pay, but it also beats inflation. There is, however, no guarantee that an HYSA will always beat inflation.

Remember, inflation is the one leak in our financial bucket that can never be permanently plugged. Keeping money in an HYSA is not a long-term path to financial independence. It just does not earn enough above the rate of inflation. It will, however, slow the financial leak somewhat, buying you time to find better opportunities for your money.

PROS AND CONS OF ONLINE BANKS AND HYSAs

HYSAs are often associated with online-only banks. Typically, savings accounts offered by an online-only bank will be HYSAs. Some brick-and-mortar banks also offer HYSAs; however, online-only banks usually have better rates because of lower overhead costs. For that reason, when referring to HYSAs, we'll assume it's with an online bank.

Although they don’t have a physical presence, online banks offer many of the same products that brick-and-mortar banks do. Checking accounts, online bill pay, CDs, and credit cards are commonly offered. You'll get most of what you expect from a traditional bank, minus the really crappy APY!

Maybe now you're convinced HYSAs and online banks are for you, and you’re ready to open an account. But wait. Before you do, you should be aware of a few minor inconveniences. None of these are deal breakers, though.

• No face-to-face transactions

  Most people won’t find this inconvenient, but online-only banks exist only online. You won’t be able to walk into a physical branch to speak with a representative or make deposits.

  
  

• Monthly withdrawal limits

  Many HYSAs limit the number of withdrawals you can make from your account each month. For example, you may be allowed only 10 withdrawals per month. A simple solution to this is to make fewer but larger withdrawals versus multiple smaller withdrawals.

  
  

• Lack of ATMs

  Although many online banks offer ATM cards, they typically don’t have their own ATMs. Rather, they’ll partner with larger ATM networks. You’ll still be able to withdraw your money, but you’ll pay a fee. There is a simple workaround for this, which I’ll go over next.

OPENING AN HYSA IS EASY

Opening an HYSA with an online bank is similar to opening a savings account with a brick-and-mortar bank. First, you'll be asked for personal information, such as your address and Social Security Number. Next, you’ll need to add money to your account.

FUNDING YOUR ACCOUNT

Depositing money into a bank that has no physical branch or ATM is actually very simple. Each online bank will give several options to fund your new HYSA. You may be able to mail a check or send a wire transfer.

But here’s the most convenient option. If you have an account with a traditional big bank, don’t close it just yet. Instead, keep it and link that account to your online bank. You’ll just need the account number and your bank's 9-digit routing number to do so.

A routing number is like a bank’s ID number. If you have a checkbook, you’ll see the routing number listed next to the account number. Otherwise, you’ll find it on your bank’s website. You can also look it up on the American Bankers Association website (www.aba.com).

Once the account is linked, you’ll be able to transfer money to your new HYSA. Likewise, anytime you need cash from your HYSA, you’ll just transfer* between banks. This way, you can ATM withdrawals without paying fees.

*Transferring money between banks typically takes 1-3 business days, so a little planning may be needed.

FAQs

Are HYSA rates fixed?

No. Just like the rates of a regular savings account, an HYSA’s rate will fluctuate. It’s important to make sure you’re always getting the best possible rate. You can always open a new account with a different online bank if it’s offering higher rates.

Can I set up to receive my paychecks via direct deposit with an HYSA?

Yes, you can. You can have your entire paycheck go to your HYSA or split it between your HYSA and brick-and-mortar bank account.

Is an HYSA different from a Money Market Account?

Yes. They share some similarities but are different types of accounts. Money Market Accounts may also offer a higher APY than a regular savings account, but it may not be as high as an HYSA. On the flip side, Money Market Accounts usually include check-writing privileges and a debit card.

I’ve never heard of many of these online banks. Are they safe?

Several websites online will regularly post a list of "best" online banks and HYSAs. Whatever bank you choose, just make sure it’s FDIC insured. If insured by the Federal Deposit Insurance Corporation (FDIC), up to $250,000 of your money is protected in case the bank fails.

Important notes:

1. The $250,000 coverage limit is for the total of all accounts, not per account. Having four different accounts doesn’t mean you get up to $1 million in coverage.

2. The coverage limit is per account holder. For example, if a joint account has two co-owners, that account is protected up to $500,000.

3. FDIC insurance does not cover investments, such as mutual funds, stocks, and bonds.

That said, many online banks won’t be familiar names. New ones are coming up all the time.

I've listed the one I use below if you're curious. This is not a recommendation and is provided as a courtesy only. I always urge you to do your own research. Please also note, I may earn a referral bonus—at no extra cost to you—if you sign up through the link. Gotta keep the coffee fund alive somehow.

• Ally Bank: Click the link to receive a $100 welcome bonus as a new customer. Offer expires 12/31/2025.

Before you commit your cash, though, it's a good idea to compare your options. We've established the benefits of an HYSA, but let's dive into the pros and cons of a high-yield savings account versus a CD to see which is better for you.

HYSA vs. CD | PROS AND CONS

A CD (Certificate of Deposit) is a type of savings account where you agree not to touch your money for a specified period of time. In exchange for restricting access to your money, banks pay you a fixed interest rate that is usually higher than that of a savings account. At the end of the term, you can withdraw your original deposit plus the interest earned.

Many people consider a CD when looking for an alternative option to a savings account because of the higher return. You’ll find them at all traditional and online banks. They’re considered safe investments and are easy to open. There are, however, some factors to consider before opening a CD.

• Not always the best rates

  Don’t automatically assume a CD will pay a higher interest rate than an HYSA. They often do, but not always. It could be the same or even worse. Always check before opening a CD.

  
  

• Fixed rates

  The interest rate of a CD does not change for the entire term. This uncertainty is a core part of the HYSA versus CD debate because an HYSA rate will swing with the market, while a CD rate is just locked in—for better or worse.

  
  

  There’s no way to know in which direction interest rates will go in the next several months. If interest rates fall past 2% but you’ve already locked in a 4.5% rate on a CD for 18 months, then you’re lucky.

  
  

  But it could go the other way as well. Interest rates could rise higher than what your CD is paying. Now, not only do you miss out on better returns, but you can’t touch your money until the CD’s maturity date.

• Restricted access and penalties for early withdrawal

  The biggest drawback to a CD is the restricted access to your money. If you deposit $10,000 into a CD with an 18-month term, you are agreeing not to touch that money for the entire 18 months. A CD is not the place to put your emergency fund.

If you absolutely must, it is possible to withdraw from your CD; however, there will be a penalty. The penalty could be a set amount or a percentage of the interest earned. If there isn’t enough interest to cover the penalty, the difference could be taken out of your original deposit.

In the best-case scenario, you lose some of the interest earned. In the worst-case scenario, you lose all of the interest and some of your original deposit. So, although CDs are considered safe, you could still lose money if you incur a penalty.

If access to your money is a priority, an HYSA might be a better option. CDs are best for money you won’t need in the short term. If you decide to open a CD but want to keep access to your money, consider shorter terms or set up a CD ladder.

If you want to learn a little more about CDs and CD ladders, check out my next post. Let me know your thoughts on HYSAs in the comment section.

See you at the finish line!

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Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.