Interest rates have been rising over the last few months at a pace we haven't seen since the late '70s. Even for avid market watchers, this fact should cut through the noise and signal we're in a historic new era of high rates.
Understanding how we got here isn't just interesting — it's vital to helping you plan how (and where) to move your money to make sure it's shielded from the challenges of a high-rate environment while taking advantage of higher annual percentage yields. Here are two actions you can take immediately to make the most of this moment, along with an explanation of how we got here and where we may be going.
Move your savings to a high-yield account
Right now, the best high-yield savings accounts have interest rates above 5%. "Savings is now very valuable," says Elliot Eisenberg, chief economist at GraphsandLaughs, an economic consulting firm. "If you have savings don't leave it where it used to be, inside a checking account that pays you nothing ... make sure to get good returns on your savings."
UFB Direct has the UFB Secure Savings account (previously known as UFB Best Savings) which currently offers one of the highest APYs on the market and no monthly fees or minimum balances.
UFB Secure Savings is offered by Axos Bank ® , a Member FDIC.
Annual Percentage Yield (APY)
Up to 5.25%APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to0.20%APY on savings
Minimum balance
$0, no minimum deposit or balance needed for savings
Fees
No monthly maintenance or service fees
Overdraft fee
Overdraft fees may be charged, according to the terms; overdraft protection available
ATM access
Free ATM card with unlimited withdrawals
Maximum transactions
Terms apply.
Read our UFB Secure Savings review.
With a Varo Savings Account, you can earn a tiered return based on your balance and whether you receive direct deposits.
Bank Account Services are provided by Varo Bank, N.A., Member FDIC.
Annual Percentage Yield (APY)
Begin earning 3.00% APY and qualify to earn 5.00% APY if meet requirements
Minimum balance
$0.01 to earn interest
Monthly fee
None
Maximum transactions
Up to 6 free withdrawals or transfers per statement cycle
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
Yes
Offer ATM card?
Yes, if have a Varo Bank Account
Terms apply.
Pay down high-interest debt
The flip side of higher savings account rates is that debt is also more expensive.
As credit card APRs exceed 20%, you may be able to save more by prioritizing paying down high-interest debt. It could also make sense to "borrow other money to pay off more expensive money," Eisenberg says. However, any money you borrow comes with a cost that is only increasing along with interest rates.
A debt consolidation loan can help you bundle together various debts into one, simplified obligation that (hopefully) charges you less in interest than what you were paying on multiple debts. Just make sure the upfront fees for your consolidation loan don't offset any potential savings.
Balance transfer credit cards allow you to transfer debt from multiple cards to a single card with a 0% APR period, which can also be a helpful way of managing expensive debt. If you go this route, make sure you can pay off the debt before and of the 0% APR period, since you'll be on the hook for interest payments after that expires.
How to think about today's high rates
The main reason rates increase is because of inflation.
In 2022, the Consumer Price Index crossed 9% for the first time in 40 years. In response, "the Fed started their rate-rising cycle with a vengeance because they were somewhat behind the times," says Eisenberg. "They fell behind the curve, inflation got out of control."
The reason rising rates can curb inflation is that it makes borrowing money more expensive and should limit spending. This led many economists to forecast a recession in 2023, though the economy remained resilient through the first half of the year.
How do today's rates compare to historical trends?
For anyone who became an adult during the 21st century, today's interest rates are the highest you've had to navigate. For example, mortgage rates crossed 7% in the fall of 2022, which was the first time we've seen mortgage rates that high in over 20 years.
There is no single entity that sets interest rates, however, the Federal Reserve's benchmark Federal Funds Rate has a large influence on rates in general. At the time of this writing, the target for the Federal Funds Rate is around 5.25 to 5.5%, the highest it's been in over 15 years. And the Fed has indicated that another rate hike is possible in September.
While today's rates are significantly higher than they were in 2020, they don't fall outside of historical norms. During the '70s and '80s, the Fed's benchmark rate topped double digits many times, and mortgage rates climbed into the teens.
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Bottom line
Today's rates are at levels we largely haven't had in two decades. That presents both opportunities and challenges.
For savers, or anyone wanting to save more, what you can earn from a high-yield savings account, money market account or CD has increased to over 5%. However, if you have high-interest debt or need to take on debt to buy a house or car, your big purchase has become significantly more expensive in the past year.
Read more
These top high-yield savings accounts could earn you over 15X more money than the national average
How do 0% APR credit cards work? 8 things to know before applying
Here's how much money you should be saving from every paycheck
Here's why the interest rate on your high-yield savings account goes up and down
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
FAQs
While rates remain high, financial advisors suggest putting money in high-yield savings accounts and locking in the high rates for the longer term with CDs. Advisors also recommend investors reassess their stock portfolios, as some sectors do better in an environment of high interest rates.
How to get rich when interest rates are high? ›
2. Dividend stocks. Dividend stocks should also do well in an environment where interest rates stay high because the dividend payments offer an immediate return to investors. After you receive the dividend, you can decide whether to reinvest the proceeds back into the company or find a better use for the cash.
Who benefits most from higher interest rates? ›
With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.
How do you invest when interest rates are high? ›
You can capitalize on higher rates by purchasing real estate and selling off unneeded assets. Short-term and floating-rate bonds are also suitable investments during rising rates as they reduce portfolio volatility. Hedge your bets by investing in inflation-proof investments and instruments with credit-based yields.
How do I lock in high interest rates? ›
Here are some ways you can lock in yield ahead of any rate cut, without worrying about fluctuations that could affect your retirement planning:
- Bonds.
- Multiyear guaranteed annuities.
- Preferred stock.
- Defined-maturity ETFs.
- Certificates of deposit (CDs)
The two most popular places to deposit cash are money market accounts and certificates of deposit (CDs). Money market accounts offer higher rates than a typical savings account and provide easy access to your funds.
How do I take advantage of high interest rates? ›
KEY TAKEAWAYS
While rates remain high, financial advisors suggest putting money in high-yield savings accounts and locking in the high rates for the longer term with CDs. Advisors also recommend investors reassess their stock portfolios, as some sectors do better in an environment of high interest rates.
Who wins from higher interest rates? ›
Nevertheless, some sectors benefit from interest rate hikes. One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase as interest rates move higher because they can charge more for lending money.
Are high interest rates good for anyone? ›
Higher interest rates also mean savers get more return on their savings. And potential borrowers find it is more expensive to take out a loan. Together these things make it less attractive for consumers and business to spend money.
What group of people benefits from a higher interest rate? ›
Unsurprisingly, bond buyers, lenders, and savers all benefit from higher rates in the early days.
Investors with idle money sitting in their brokerage accounts can get an easy bump just by moving money out of low-paying “sweep” accounts and into money-market funds paying more than 5%. Money markets aren't FDIC-insured, but they generally invest in low-risk, short-term assets.
Should I buy bonds when interest rates are high? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
What can I do with higher interest rates? ›
Dealing with a rise in interest rates
- reduce expenses so you have more money to pay down your debt.
- pay down the debt with the highest interest rate first. ...
- consolidate high interest debts, such as credit cards, into a loan with a lower interest rate.
According to the DCB Bank website, the new rates are effective May 22, 2024. The bank is offering the highest FD interest rate of 8% to general customers and 8.55% for senior citizens after the revision in tenure from 19 months to 20 months. The highest savings account interest rate offered is up to 8%.
How to profit from rising interest rates? ›
These options could include:
- Individual bonds versus bond funds.
- Treasury bonds or notes.
- Real estate investment trusts, or REITs, which tend to hold up well or even outperform during times of rising interest rates.
- Preferred stocks versus common stocks.
When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing. A bank can earn a full percentage point more than it pays in interest simply by lending out the money at short-term interest rates.
What to do with money when interest rates rise? ›
8 money moves to make as interest rates remain high
- In a nutshell. ...
- Search for banks with the best savings accounts. ...
- Keep an eye on credit card interest. ...
- Refinance a mortgage (it's not too late) ...
- Invest in stocks. ...
- Consider Treasury Inflation-Protected Securities (TIPS) ...
- Buy short-term bonds instead of long-term bonds.
The long-term effect of compound interest on savings and investments is indeed powerful. Because it grows your money much faster than simple interest, compound interest is a central factor in increasing wealth. It also mitigates a rising cost of living caused by inflation.
How do you survive high interest rates? ›
Dealing with a rise in interest rates
- reduce expenses so you have more money to pay down your debt.
- pay down the debt with the highest interest rate first. ...
- consolidate high interest debts, such as credit cards, into a loan with a lower interest rate.
- High-yield savings accounts. The national average rate on savings accounts is 0.46%, but consumers today are finding returns that are often 10 times higher in high-yield savings accounts. ...
- Rewards checking accounts. ...
- Certificates of deposit. ...
- CD ladders and how to build one. ...
- Money market accounts. ...
- Government bonds.
