What to do with the money when the Fed raises interest rates

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Here’s what: Now is a good time to save and invest strategically

The Federal Reserve raised interest rates once again this week, by 0.75 percentage points. The goal is to cool the economy and keep high inflation in check, but the repeated hikes “will bring some pain” to households and businesses in the short term, Fed Chairman Jerome Powell said.

If you have recently been buying a home or looking to borrow money for your business, you are undoubtedly keenly aware of that “pain”. Just this month, mortgage rates jumped to 6% for the first time since 2008, an astronomical rise from the pandemic-era lows in the 2% range.

And while inflation is likely eating up every extra dollar in your budget, there are some clever things you can do with your money right now to help it grow while interest rates remain high.

Switch to a high yield savings account

If you have savings that are in a typical bank savings account (currently earning 0.17% on average) run, don’t walk, to open a high yield savings account. Many HYSAs currently offer 2% or more. Make sure you choose an FDIC insured account.

Buy I Bonds and Short Term Bonds

The “I” in Series I savings bonds stands for inflation, which means that the rate offered by these bonds is tied to the rate of inflation (which, as we all know, is currently skyrocketing). At the moment, Series I bonds are paying 9.62% and individuals can purchase up to $ 10,000 per year.

“If you have cash that you are sure you won’t need for 12 months, consider buying Series I bonds,” says financial planner Natalie Taylor. “Rates are reset every six months, but if inflation and interest rates continue to be high, Series I bonds will continue to pay very attractive interest.”

Brian Mattox, vice president and chief investment officer of Kendall Capital, adds that buying short-term bonds is profitable right now. “Short-term (two-year) treasury bills are paying as much or more than 10 years or even 30 years,” he says. In addition, “short-term debt instruments can be reinvested after maturity to earn even higher rates in a rapidly rising rate environment.”

Avoid floating rate debt

If you need to make a large purchase right now, try to avoid using variable rate debt to do so. For example, says Taylor, if you’re buying a home, try locking out a fixed-rate mortgage – you can always refinance in the future if rates drop again.

“The benefit of a fixed-rate mortgage is that your interest rate will never change, but with an adjustable-rate mortgage, your interest rate can go up if interest rates continue to rise,” he says.

Now is also a good time to consider balance transfer offers on your credit cards, as your monthly interest rate may change as the Fed raises rates.

“If you are carrying a high balance on your credit card, consider transferring the balance to a zero-rate balance transfer card that locks a zero rate for a temporary period,” says financial planner Jovan Johnson.

Stick to your long-term investment plan

If you’d rather do absolutely nothing right now because thinking about money is so overwhelming, that’s fine. In fact, it’s the best thing you can do with your investments, especially your retirement savings.

“Stay true to your long-term investment plan,” says Mattox. “Don’t let Fed interest rate movements and the resulting stock market volatility scare you into any rash and large-scale portfolio allocation change.”

– Stephanie Hallett, chief editor of Personal Finance Insider

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