Key Points
- The Federal Reserve raised interest rates by 0.75 percentage points in July, the most significant increase since 1994, to combat inflation.
- Higher borrowing costs resulting from the recent rate hike are expected to negatively impact economic growth by slowing it down.
- Now is an opportune time to invest funds earmarked for short to mid-term use in the next 1-3 years.
- High-yield savings accounts, money market funds, short-term Treasury securities, and Certificates of Deposit (CDs) are viable investment options.
- Your choice of investment should align with your cash flow requirements and risk tolerance.
Introduction
The story of rising interest rates in 2023 dominated the third-quarter news. In July, the Federal Reserve took a bold step by raising interest rates by 0.75 percentage points, marking the largest increase since 1994. This move was aimed at combating inflation, which has been soaring to a 40-year high. While this rate hike is expected to have a significant impact on the economy, including slowing growth and making borrowing more expensive, it also presents opportunities for savvy investors looking for a spot to place cash.
Specifically, if you have funds earmarked for short to mid-term needs within the next 1-3 years, this is the best time in years to consider your investment options. Below are actionable investment options tailored for such financial goals.
Note: Throughout this article, examples of rates on each option are provided for illustrative purposes only. I am not affiliated with any of these, nor am I endorsing them over any other product. You must research or consult your advisor for investments appropriate to your situation.
Actionable Investment Options
High-Yield Savings Accounts
The first step is to ensure you have a high-yield savings account. Banks like Capital One have increased their yields due to rising competition, but these changes are not automatically applied to existing accounts. Whoever your bank is, confirm the interest rate you are receiving. As of October 11th, Capital One’s High-Yield Savings Account offers a rate of 4.3%.
Money Market Funds
Money market funds are low-risk investment options that invest in short-term debt securities. They offer high liquidity and require a brokerage or investment account for access. For instance, Schwab Value Advantage Money Fund (SWVXX) has a 7-day yield of 5.25% as of October 11th.
Short-term Treasury Securities
These are safe investments issued by the U.S. government. As of October 11th, 52-week Treasury bills offer a rate of 5.39%. The Treasury sells them directly or can be purchased on the secondary market, where they are actively traded.
Certificates of Deposit (CDs)
CDs are sold directly from banks, offer a fixed interest rate over a specified period, and are suitable for short- and mid-term investors. Capital One, for instance, is currently offering a 12-month CD with a rate of 5.00%.
Brokered CDs
These are offered through brokerage firms and can offer higher interest rates or more flexible terms than traditional CDs. However, they may come with additional risks, including fluctuating market prices. Rates are very similar, if not higher, than CDs purchased directly. Here are two examples of brokered CDs that could be purchased on October 11th but some of these can be callable, meaning the bank can redeem them early if the rates decline:
Final Thoughts
Each of these options has pros and cons, depending on your cash flow requirements and risk tolerance. High-yield savings accounts and money market funds offer flexibility but may have lower rates. On the other hand, Treasury securities and CDs provide higher returns but come with penalties for early withdrawal. If purchased on the secondary market and not held to maturity, the principal value of anything traded on the open market will fluctuate with interest rate moves.
Frequently Asked Questions (FAQ)
Q: How do rising interest rates affect my existing loans?
A: Rising interest rates generally mean higher costs for new loans and for existing variable-rate loans. Rising rates will not affect fixed-rate loans.
Q: Can I still get a mortgage or auto loan with higher interest rates?
A: Yes, but you’ll likely face higher monthly payments.
Q: Are my existing fixed-rate loans affected?
A: No, fixed-rate loans remain unchanged regardless of interest rate hikes.
Q: How do rising rates affect the stock market?
A: Generally, rising rates can lead to lower stock prices as borrowing costs rise and consumer spending slows.
Q: Should I consider refinancing my loans?
A: If you have variable-rate loans, refinancing to a fixed-rate loan could be a wise move to lock in current rates. If you have fixed-rate loans, you may not want to refinance.
Q: What happens to my investment in CDs or money markets if interest rates continue to rise?
A: If you have a fixed-rate CD, the interest rate will remain the same until maturity, regardless of changes in market rates. For money market funds, the yield may increase as the fund’s investments mature and are reinvested at higher rates. However, it’s important to note that the rate for money market accounts (which are different from money market funds) may also adjust upwards, but this is at the discretion of the financial institution.
Navigating the financial waters amid rising interest rates can be challenging, but with the right investment choices, you can sail smoothly. Feel free to reach out for personalized financial planning and investment advice tailored to your needs.
If you found this article helpful, please share it with others who might benefit from this information. If you have any questions or want to explore how a Flat-Rate Fee-Only structure can help you achieve your goals, set up a time to talk. Your financial well-being is too important to leave to chance. Choose wisely.
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