Wringing the Most from Your Savings in a Rising Interest Rate Environment

Written by , March 29, 2011

Wringing the Most from Your Savings in a Rising Interest Rate EnvironmentLow interest rates are good news if you are looking to borrow money. But they’re not so good for savings and investment accounts. When it comes to those, the only good news is that once interest rates get so low, there’s nowhere for them to go but up.

Once interest rates start to rise, those who have money in savings are often eager to take advantage of the higher rates. That’s certainly understandable, but it’s important not to be too hasty. If you are, you could end up regretting it when rates go even higher.

Here’s advice on how to get as much as possible out of your savings when interest rates are on the rise.

  • Reject the notion that long-term is always better. When interest rates are likely to rise, it isn’t. Sure, putting your money into a 5-year CD will allow you to lock in the current interest rate, but if rates continue to rise, you’ll be kicking yourself in a few months.
  • Short-term CDs offer lower rates than those with a longer term, but they give you access to your money sooner. That means you can reinvest it into something that offers higher interest. When rates are rising, shopping around to find the best possible rates for a short-term CD is a better strategy than locking your money up for a long time just to get a slightly higher return than you’re currently getting.
  • Try to find a step up CD. These CDs allow you to step up to the current interest rate at least once during the CD’s term. Some even automatically adjust the rate periodically. If you have one of these, investing for a longer term could still pay off.
  • Consider a money market account. These offer lower interest than CDs, but they give you quick access to your money. If you want to be able to take advantage of higher interest rates at any time, this is the way to do so while still earning some interest on your money.
  • Whatever you do, make sure that you read the fine print. Each financial institution has different terms for different accounts, and if you don’t fully understand them, you could end up paying out money in fees. That super interest rate won’t mean much if you have to sacrifice part of your earnings because you withdrew too early or let your account balance drop too low.
  • Getting the best possible interest rate is important for anyone with money in savings. But jumping on a higher rate as soon as it becomes available isn’t always smart. If rates are predicted to keep rising, you’ll want to have money available to invest when they’re at their peak. While keeping your funds accessible might mean you’ll earn a little less in the short term, it will likely pay off big in the long run.

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