In the last 12 months, interest rates have risen at a pace we haven’t seen since the late 1970s. The main reason rates are so high now is the rapid growth of inflation. In 2022, the Consumer Price Index – which measures inflation – surpassed 9% for the first time in 40 years.
In response, the Federal Reserve (Fed), the American Central Bank, began its cycle of interest rate hikes to try to control inflation. The logic behind this strategy is simple: with high interest rates, people use their credit cards less, buy fewer cars and houses, in short, they go into debt less. With lower consumption, prices tend to fall.
If you became an adult during the 21st century, today’s interest rates are undoubtedly the highest you’ve seen. Interest rates for financing a home, for example, exceeded 7% last fall, the highest mortgage rates in the last 20 years.
How to Benefit from High Interest Rates?
The rates today are at levels we haven’t seen in two decades. This presents opportunities and challenges. Here is one action you can take immediately to make the most of this moment.
Open a High-Yield Savings Account or a CD
If you have money sitting in a checking account or traditional savings account, you are missing out on the opportunity to grow your money. With interest rates so high, it’s time to transfer that money to a High-Yield Savings Account or a CD – Certificate of Deposit Account. What’s the difference between them?
(1) High-Yield Savings Account
High-yield savings accounts allow you to earn a higher interest rate (compared to traditional savings accounts), which makes your money grow even faster. To put this into perspective, some high-yield savings accounts are offering over 4% interest, while the national average APY (annual percentage yield) for traditional savings accounts is only 0.33%.
The APY that high-yield savings accounts offer when you open the account can change at any time. These rates go up and down according to changes made by the Federal Reserve. In other words, there will be times when you earn less money on your balance, but also times when you earn more money. Regardless, it is still more than you would earn if you kept your money in a traditional savings account.
The most important thing about this type of account is that you still have access to your money when you need it, meaning you can withdraw it at any time without losing earnings, as you would in a traditional savings account. Therefore, this account is generally recommended for keeping that money you save for emergencies.
(2) CD – Certificate of Deposit
Similar to a high-yield savings account, CDs allow you to deposit money to earn interest on your balance. Sometimes, the interest you earn on a CD can be even higher than what you earn in a high-yield savings account.
However, the difference between these two accounts is that in a CD you need to keep your money in the account for a specified period. This period is called the “term.” The duration of terms varies, ranging from three, five, and even 12 months. Generally, the longer the term, the more interest you will earn. If you need to withdraw the money before the term, you will incur a penalty.
Penalties can vary depending on the bank. Typically, the penalty is equivalent to the interest earned, or the interest you would have earned over a certain number of days or months.
Additionally, another difference compared to a high-yield savings account is that in a CD, the interest rate offered cannot change during the agreed term. However, you also cannot make additional contributions to the CD after opening the account and making the initial deposit.
Thus, this type of account is recommended for saving that money you won’t need in an emergency but are accumulating for a down payment on a house, a car, or to take that long-dreamed trip.