How to get the most out of your cash when inflation is running hot

Stocks may be the best way to protect your savings from inflation, but it's also wise to keep some cash on hand for emergency funds, expenses and short-term financial goals. Yet while there's only so much you can do to protect your cash hoard in today's low-yield, high-inflation environment, there are ways to maximize yield on your cash to minimize the effects of inflation.

Online savings accounts

Online savings accounts have long been considered a great place for your cash. They're as safe as savings accounts at brick-and-mortar banks, but they have a history of rates that are up to eight times higher. Online savings account rates today may be less than the inflation rate today with yields so low, but they remain a good option for your emergency fund.

One reason: Online savings accounts are liquid, which allows you to quickly transfer funds to your checking account to pay bills. That also lets you make transfers to other online savings accounts that offer better rates. 

In today's environment, many banks, including digital banks, have too much in deposits, which has contributed to record low deposit rates. However, a few banks are still trying to attract deposits by maintaining competitive interest rates. For savers, it's especially important now to shop around for those banks, as moving your money to a higher-rate online savings account can easily double your yield without adding risk.

High-yield reward checking accounts

If you're shopping for higher online savings account rates, another deposit account to consider is the high-yield reward checking account. To qualify, you must meet monthly requirements, namely, using your debit card to make eight to 20 purchases per month. When you meet those requirements, you're rewarded with a high yield, which can range between 1% and 4%. 

Most high-yield reward checking accounts are free, with no monthly service fees even if you don't meet the monthly requirements. These accounts also all have balance caps, so only balances up to a certain amount qualify for the high rate. The balance caps typically range from $5,000 to $25,000.

Series I savings bonds

Neither an online savings account nor a high-yield reward checking account is guaranteed to keep up with inflation. However, there is one investment with no principal risk that is guaranteed to keep up with inflation: the Series I Savings Bond (I bond). 

Available from the U.S. Treasury, an I bond offers a total interest rate that combines a fixed rate and an inflation rate. When you buy an I bond, the fixed rate at the time of the purchase remains unchanged until the I bond matures or is redeemed. The inflation rate changes every six months based on inflation. In past years, the fixed rate has been as high as 3.60%, but at the moment it's zero. Still, that allows your investment to keep up with inflation.

Notably, however, there are three important downsides to I bonds. First, you can only purchase a maximum of $10,000 per calendar year online from the Treasury, though you can buy an additional $5,000 per year through your federal tax refund. So I bonds may not be enough for your cash savings. 

Additionally, when you buy an I bond, you can't access it for at least one year. You can redeem the I bond after that, but there's a three-month interest penalty if you redeem within the first five years. Still, this penalty is mild when compared to early withdrawal penalties of most bank CDs.

Remember, you don't necessarily have to choose between the above options. When investing, diversification is key to reducing risk and maximizing long-term yield, and it can be similarly helpful in maximizing yield for your cash savings. Using a combination of online savings accounts, high-yield reward checking accounts and I bonds can help keep your cash earning a rate that's at least close to inflation. 

Most important, it will keep your cash safe and liquid for future short-term goals, expenses and emergencies.

Ken Tumin is founder and editor of DepositAccounts.com, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.