Whether it’s at the stock market or at the grocery store checkout, you probably feel like your money is slipping away from you, but there’s a silver lining.
High interest rates mean that money that would normally sit in an account is finally growing.
“For the first time in a long time, we’re actually discussing getting a return from a bank,” said Anastasia Wiese, senior financial adviser at Grand Wealth Management in Grand Rapids.
The Federal Reserve has already hiked interest rates five times to combat high inflation and further hikes are expected. This makes borrowing for cars, homes and credit card purchases more expensive, but it gives savers a boost.
The average yield on a savings account has more than doubled since the Fed’s first rate hike in March, according to data from Bankrate.
Most people are used to seeing pennies on the dollar piling up each month in savings accounts that have historically low interest rates. The national average is currently 0.16% according to Bankrate data from October 5.
However, the deals are out there. The highest rate listed among Bankrate’s “Best Savings Accounts” was 2.85%.
Keeping money in a savings account or transferring it to a high-yield account is the best option for those who need their cash short-term, Wiese said.
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Financial advisors have always advised staying the course with all long-term savings plans, including keeping money in stocks and 401k.
It’s hard to watch investments tumble and not feel the impulse to move into cash, but liquidating long-term savings now would “lock in that loss,” Wiese said.
“By exiting the market and doing market timing, it really gives you two opportunities to get it wrong,” she said. “One to exit the market, then one to return. The best thing to do is try to remove as much emotion from this investment landscape that we find ourselves in right now.”
For those still interested in the stock market, Wiese advises changing the mindset to “stocks are for sale” and remembering that the market historically bounces back after recessions.
Related: Stocks fall again. Should I sell?
If you can’t stand the roller coaster of the stock market, there are still options to make your money grow.
Wiese advises customers who have big purchases, like a new car or home improvement, coming in the next 12 to 18 months to consider a short-term certificate of deposit.
“It’s such a short investment time horizon. So better to have that in a less volatile product,” she said.
Certificates of deposit, or CDs, typically range from a three-month to five-year investment.
The national average for a six-month CD is 0.34%, but again, bigger, safer banks with more capital are raising their rates to attract customers. Bankrate’s top pick for October has a rate of 2.69%.
While the financial services firm warns that CD rates are being impacted by the Federal Reserve, it notes that rates can be locked in for the entire term even if rates drop.
Withdrawing money from the CD early, much like a 401k, has its downsides. The ideal way to use the CD is to use it to grow money over a set period of time, Wiese said.
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Given the period of high inflation, I bonds have also regained their popularity. The Series I Savings Bond is inflation-linked, so investors earn a fixed interest rate and a rate that changes with inflation. Twice a year, the US Treasury Department sets the inflation rate for the next 6 months.
There has been record demand for I bonds since the rate jumped to 7.12% last November.
Since then, there have been more than $27 billion in sales, according to the Treasury. Compare that to $364 million in 2020.
Currently, I bonds offer an annual yield of 9.62% through October, the highest rate since the assets were introduced in 1998.
You must keep an I bond for at least 12 months, but you can keep it for 30 years. Wiese encourages keeping the investment for at least five years to avoid any further penalties.
The main benefit is that consumers do not pay state or local taxes on I Bonds. However, federal taxes still apply.
Bonds also have a low barrier of entry for investors.
Electronic bonds I cost at least $25 and paper bonds must be at least $50. There is a cap of $10,000 in electronic I bonds and up to $5,000 in paper I bonds. Any purchase of I bonds must be made through the CashDirect website and cannot be done through a third party such as a broker.
This type of bond should be considered part of the fixed-income portion of your financial portfolio, Wiese said.
Wiese’s advice for these bonds is for something long-term like an education fund. The idea is to lay down a long trail for the money to take off and grow, but also keep in mind that rates will change twice a year.
“It’s not a guarantee that it will continue to increase,” she said. “And we’re probably nearing the top of the height of that yield on an I bond.”
Customers watching the Fed closely come to Wiese confused and worried about what these aggressive hikes will mean for their accounts, she said. Wiese reminds them that any decision made by the Fed takes time to trickle down to the average consumer. When consumers see interest rate spikes, it’s mostly coming from creditors anticipating the Fed’s next move, she said.
Although she calls the current environment “unique,” her financial advice hasn’t changed much: have a mix of stocks and bonds, keep your portfolio diversified, and stay the course.
“Keep your head down, don’t watch the news so much when they’re talking about the market and just go with your plan,” she said.
Want to know more about the economy? See all our inflation hedge here.
This story is part of MLive’s Wallet Watch series focusing on today’s economic issues. Do you have a wallet watch suggestion? Email us at firstname.lastname@example.org
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