8 money moves to make as interest rates remain high

In a nutshell

Since the Federal Reserve started its most aggressive rate hiking campaign in decades, the landscape for savers and investors has changed profoundly.

• Before 2022 investors stayed with stocks and avoided bonds because of TINA (There Is No Alternative) to get a better yield. For the last year, however, attractive alternatives to stocks have appeared.
• Inflows into money market funds increased by $75 billion in 2023 according to Reuters.
• By early 2023, big banks like Wells Fargo started paying over 1% for interest-bearing deposits versus paying just 0.04% in year prior, as reported by AP News.
• In testimony before Congress on March 6th, 2024, Federal Reserve Chairman Jerome Powell said that he believes the central bank is done raising rates, but that rates may need to stay at their current levels longer than the markets had hoped at the end of last year.

What does this mean in terms of our money? Here are eight money moves to consider as interest rates remain at their highest levels this century.

1. Search for banks with the best savings accounts

The money you need to keep for savings should be in a liquid and safe account that provides the highest possible interest rate. We have seen banks across the country raise rates on deposit accounts of all varieties, but you may still be able to get a higher yield on your savings or checking accounts by opening a new account at your current bank or opening an account at a new online bank and moving your money into it.

If you haven’t used them, this is a good time to check out online banks and non-bank financial institutions like brokers that offer Cash Management Accounts (CMAs) to search out the best accounts for your savings, including your emergency fund.

2. Keep an eye on credit card interest

Reducing the interest you pay on credit card debt should always be a priority. This is especially true during a period of high interest rates. The interest rate on many credit cards is tied to the prime rate, and credit card rates have risen as a result of the Fed's moves.

If you find yourself with a lot of credit card debt, this is a great time to do what you can to accelerate payments to reduce this debt.

Another tactic is to look for lower-rate balance transfer offers and transfer your higher rate balances to that card. This can help reduce the amount of interest you are paying. It can also help by allowing more of the payments you make to go towards reducing the balance on the card versus paying interest costs.

3. Refinance a mortgage (it’s not too late)

Though mortgage rates have pulled back recently from their decade-long highs in October of 2023, they are still much higher than they were in the 10 years before the beginning of the pandemic. However, there are still some homeowners who might benefit from refinancing even in this higher interest rate environment. For example, homeowners with an adjustable or variable rate mortgage may see their rates going up in the near future and decide to lock in a lower rate now.

Another group who may benefit are those with a mortgage at a higher rate that they took out when their credit score was lower. If their financial situation has improved it can still make sense to refinance into a new mortgage if the rate is lower than what they are currently paying.

Beyond protecting your finances from inflation and interest rate hikes, there are a number of investments that are producing better returns now than they have in the past two years or longer.

4. Invest in stocks

Stocks in general tend to outpace inflation over time and are considered to be a good hedge. Many companies may be able to increase their prices for the goods or services they sell at a higher rate than any increases in their costs. This leads to higher profits.

In periods of rising interest rates, certain types of companies may benefit more than others. One example are bank stocks. Banks make money from the interest they charge on loans. As interest rates rise, banks can often charge a higher interest rate on loans and credit cards compared with the rates they have to pay savings and other interest bearing accounts.

5. Consider Treasury Inflation-Protected Securities (TIPs)

TIPs stands for Treasury Inflation-Protected Securities. These are Treasury bonds whose interest rate is tied to inflation. In a period of elevated inflation, TIPs offer a level of protection from inflation due to the periodic increases in the interest rate that are tied to the Consumer Price Index (CPI).

TIPs can also work the other way as the rate would decrease during a period of deflation, but if investors hold their TIPS to maturity they are guaranteed to get the full face value of the bond even if there is currency deflation during the bond term. TIPs are issued by the U.S. Treasury, so they are among the safest fixed income investments you can make.

6. Buy short-term bonds instead of long-term bonds

The price of a bond moves inversely to the direction of interest rates. In a period of rising interest rates, the price of existing bonds will decline. Bonds with a longer time to mature will feel a greater impact from an increase in interest rates than a bond with a shorter maturity. This is also true with bond mutual funds and bond ETFs. Since short-term bonds are less impacted by increasing interest rates, they can serve as a defensive investment.

One of the issues that comes with investing in bond mutual funds and ETFs is that unlike an individual bond holding, bond funds and ETFs do not mature. With an individual bond, even if the price that you could sell your bond for declines, if you hold the bond until maturity you will still receive the bond’s face value, along with all interest payments due prior to maturity. With a fund or ETF, the share price of the fund falls, and that’s the end of it.

One strategy to consider is laddering several bonds by maturity dates. You might have a bond that matures in three months, six months, one year, two years, and so on. When each bond matures you can make a decision as to what to do with this money. You could buy a bond that matures at the longer end of the ladder or invest the money elsewhere.

7. Buy gold and precious metals

Gold and other precious metals have traditionally been a store of value and a hedge against inflation. This may or may not always be the case during every period of inflation, but this is an asset class to consider.

You can own gold and other metals directly. If you go this route, be sure that you are buying from a reputable broker and have a place to store your gold (like a safe).

An alternative would be to invest through a mutual fund or ETF. For example, some funds hold gold bullion while others own shares of gold miners or other companies that participate in the economy of producing gold. When you invest in these funds, there are no storage issues, and buying and selling fund shares is the same as with any other ETF.

8. Reduce financial risk by diversifying

Diversifying your investments is a good idea in any market environment. Periods of both rising inflation and rising interest rates are not an exception. In a diversified portfolio the investor has a number of different holdings across several assets classes. Some react differently to factors such as changes in inflation or interest rates.

If you find that your portfolio is overweight in just a few investments, or that you have a high percentage of your holdings allocated to stocks or bonds, this is a good time to review your investing strategy with an eye towards “putting your investment eggs in a few different baskets.” Being too concentrated in any single holding or type of investment is always a risk. In an environment of elevated interest rates and inflation, these risks can be magnified.

If you haven’t worked with a financial advisor in the past, this is a good time to find a fee-only advisor who can take an independent look at your investments and suggest any needed changes in your investment allocation.

The AP Buyline roundup: Being proactive will keep you a step ahead

We are in a period of both rising inflation and rising interest rates after a number of years with low interest rates and virtually no inflation. This can be an adjustment for many investors. These 8 steps, plus others can help you combat the impact of these two major forces on your money.