How a CD can protect your savings from inflation

Inflation can erode the value of your money over time. This affects not only your purchasing power but also the value of your hard-earned savings. In today's economic environment, it's essential to consider how your savings can keep up with ever-rising inflation rates.

One option is a certificate of deposit (CD). CDs are safe, low-risk savings accounts that offer high rates and fixed interest rates for the duration of the term. They're a smart place to keep your money at any time, but especially when inflation is high.

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How a CD can protect your savings from inflation

When the economy experiences inflation, the value of money decreases over time. Luckily, CDs can preserve your savings and your earning potential as the prices rise and the dollar's purchasing power declines.

One of the most attractive features of CDs for investors is that they offer a fixed rate of return over a set period. Unlike a savings account, where the interest rate can change regularly, a CD's interest rate remains the same throughout the term.

This means that once you've signed up for a CD, you know exactly how much interest you'll earn at the end of the maturity period, regardless of market conditions. If the Federal Reserve begins to lower interest rates — as many experts believe it will starting next year — savings account rates will go down too. But you'll continue to earn the same rate on your CD as when you opened it.

With the benchmark interest currently at a 22-year high, today's top CDs offer rates up to 5.50% — over 12 times the national average savings rate and higher than even high-yield savings accounts. That makes now a great time to open a CD and lock in a great rate to help you grow your savings faster despite inflation.

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Other benefits of CDs

In addition to protection from inflation, CDs also offer benefits that include:

Low risk

CDs may not have the potential to grow your earnings exponentially the way investments like stocks do, but they also don't have the potential for huge losses. You'll never lose your principal balance, and the only time you may lose earnings is if you withdraw funds before the term expires.

This makes them an attractive option for investors who want to protect their savings from market volatility as well as inflation.

Safety

CDs are backed by FDIC insurance (if held at a bank) or NCUA insurance (if held at a credit union). That means your money is protected up to $250,000 per account, per institution, should the bank or credit union fail.

Start by comparing your CD options here.

Multiple terms to choose from

CDs come in both short- and long-term options, allowing you to select the best timeframe for your financial needs and goals. Short-term CDs range from three to 12 months, while long-term CDs can go up to five years.

Discipline

Investing in a CD can also help you avoid the temptation to dip into your savings before you really need to. CDs impose a penalty for early withdrawal — and if you take your money out before the end of the term, you lose some of the interest you've earned. This penalty can act as a deterrent against impulsive spending and help you stay committed to your savings goals.

The bottom line

You can't control inflation, but you can control where you keep your savings. By opening a CD, you can ensure your money will grow at a high rate despite market volatility, helping you to preserve more of your savings value despite inflation.