How to get more from higher interest rates

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Learn about some of the ways you may be able to take advantage of a high interest rate environment.

Interest rate movements may often seem like a spectator sport. Your advisor may share announcements that the Federal Reserve is raising interest rates, lowering them, or keeping them the same. If you’re not buying property or thinking of applying for a personal loan, are you paying enough attention?

The right answer to this question is that you should be. Why? Because in a high interest rate environment, you may have an opportunity to make your money work harder for you through cash alternative accounts or investments that offer a higher rate of return than your average checking or savings account.

So, what are some of the ways to potentially take advantage of higher interest rates? You may want to discuss the following with your financial advisor:

  • Deposit accounts that pay higher rates of interest. Certain types of deposit accounts that are connected to your investment accounts have the potential to offer you superior interest rates versus a savings account as well as easy access to your money when you need it. Your financial advisor may be a good person to talk to about this type of account. A minimum deposit is required, and as is the case with other types of deposit accounts, interest rates will fluctuate over time.
  • Certificates of deposit (CDs). These types of investments also offer higher rates of interest than regular deposit accounts and have the added advantage of enabling you to lock in higher rates for the term of the CD. Seek advice from your financial professional if you are thinking of putting your money in a CD. Some CDs require you to give up liquidity in exchange for that higher interest rate; those types of CDs may be unsuitable if you need quick access to your funds. Others may charge penalties upon early withdrawal.
  • Ultra-short-term assets, such as Treasury bills. Like CDs, these types of investments offer you the potential to earn a higher rate of return on your money than regular checking and savings accounts. It is possible to sell your Treasury bills prior to maturity if you need the money sooner than you had anticipated, but bond prices fluctuate, so you may find that it could result in a financial loss if you do so.

Often, the rate of return you earn on a savings account does not keep pace with the rate of inflation. If you have a large amount of money in a checking or savings account, you may find that price increases may eat away at the purchasing power of your money over time.

Add your cash-flow and short-term liquidity needs to the list of topics you would like to discuss with your financial advisor. Your advisor can help you make an informed decision that can move you from a spectator to a participant in helping you meet your financial goals.

Investments in fixed-income securities are subject to market, interest rate, credit, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can cause a bond’s price to fall. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower-rated bonds. If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity.