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The Inflation Conundrum: For Every Dollar You Save, You Throw 7 Cents Away

Inflation has dominated recent headlines. In December 2021, the rate of inflation reached 7% — and it just kept going up in subsequent months, peaking at 9.1% in June 2022 (according to the U.S Bureau of Labor Statistics).

Everyday Americans feel the pain of inflation day-in and day-out, whether at the grocery store, gas pump, or when holiday gift shopping for friends and family.

They’re also feeling it in their paychecks and in their savings accounts — if earnings and interest rates fail to increase at the same pace as inflation. And that’s where the inflation conundrum is creating problems as 2022 closes and the start of 2023 draws nearer: Rates are going up everywhere except in savings accounts.

Which means account holders are throwing away between 7¢ and 8¢ for every dollar they save.

Inflation Leads to Higher Interest Rates

The U.S. government has only so many tools in its toolbox for fighting inflation. One of the most commonly used tools is raising interest rates, which the Federal Reserve has done repeatedly in 2022. In fact, the Federal Reserve raised interest rates six times between March and November:

  • .25%–.50% on March 17

  • .75%–1% on May 5

  • 1.5%–1.75% on June 16

  • 2.25%–2.5% on July 27

  • 3%–3.25% on Sept. 21

  • 3.75% to 4% on Nov. 2

So, how does this affect everyday consumers? As the Federal Reserve continues to drive interest rates higher and higher, consumers are paying the price with higher costs for loans. For example, back in January 2022 interest rates for 30 year mortgages hovered around 3-4% vs, the almost 7% reported in November 2022.

This is detrimental for consumers that want to finance the purchase of cars and homes. One would think there might be an accompanying silver lining: that the interest rates available on savings accounts would also increase, but alas this is not the case. As of June 2022, Americans owned $16.8 trillion in deposits at commercial banks, most of it in checking and savings accounts. Interest rates on those accounts have hardly budged.

In March 2020, Americans could earn a paltry .1% on money held in standard savings accounts. That figure has only grown to .14% in recent months, significantly falling behind the pace of inflation. For every dollar you sock away in a savings account right now, you’re losing the difference between that account’s interest rate and the rate of inflation. In a month when inflation is 8% and your money sits in a savings account earning .14%, you are losing 7.86¢ for every dollar sitting in that account, producing a negative rate of return.

Why Aren’t Higher Rates Available Through Savings Accounts?

Commercial banks are businesses that operate on simple supply and demand. Traditionally, banks have relied on customers with deposits to fund their lending businesses. Without depositors, banks couldn’t make home loans, car loans, unsecured loans, etc.

Banks are flush with cash right now. The personal savings rate in the U.S. spiked during the pandemic, which means banks have plenty of deposits to back loans. With this influx of cash, there’s no incentive for banks to increase rates for savings accounts.

Invest in a Way That Beats Inflation

The situation is far from hopeless for American consumers who have investment options beyond the traditional savings account that provide much better returns and fight the pitfalls of inflation. For many, index funds and many other mainstream securities options may provide decent returns, but these too can't keep up with inflation, therefore produce net negative capital gains. But, for those searching for an investment vehicle that offers the possibility of monthly cash flow as well as generous returns upon exit, keep on reading.

Some investors often find their way to real estate through the acquisition of multiple single-family home rentals, whether on a short or long-term basis. But cash flow is inconsistent and owning rental properties can also come with a lot of work — even when the investor hires a management company.

There’s a different approach to real estate investing, one that offers cash flow potential and strong returns while allowing the investor to be a fully passive participant. It’s called real estate syndication, and it’s one of your best options for trying to keep pace with (or even beat) the current rate of inflation when markets are volatile.

Get a Blueprint for Real Estate Investing

Real estate investing can be a bit daunting for first-time investors, this is why we created a roadmap, or blueprint rather, that highlights key considerations when deciding on which investment vehicle is perfect for their resources and the time and energy they can or are willing to invest.

Madison Investing offers a free course called Blueprint for Passive Real Estate Investing. This seven-part course walks you step-by-step through the considerations and decisions that are part of the real estate process — including a rundown of different investments, from active options like self-managed rental properties to passive approaches like real estate syndication.

At the end of the course, you should be able to pair your financial goals with an investment strategy that matches your current circumstances.



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