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What can I do to use high interest rates to my advantage?

If you want to take advantage of higher interest rates, letting your money sit in regular checking and savings accounts is probably not the best option. To earn more on your cash balances, consider looking at other options. Fixed-income investments and high yield savings accounts are two alternatives that could help you earn more interest on your money compared to regular accounts.

How fixed-income investments work.

Fixed-income investments let you put in money and get it back later with interest. The money you put in is the principal, and the interest is what you earn on the amount you deposited.


CDs

A certificate of deposit (CD) is a special type of savings account. It pays more interest than a regular savings account but requires commitment. You have to leave your money in the CD for a set amount of time, called the term. The term can be a few months or up to five years.

Longer terms earn more interest. Right now, CDs that last for five years are paying the most interest they have in almost 15 years.

  • Pros:
  • Guaranteed higher rate of return than traditional savings accounts
  • Each depositor FDIC-insured to at least $250,000
  • Cons:
  • Subject to early withdrawal fees
  • Short-term CDs (one year or less) may pay lower returns

Money Market Funds and Money Market Bank Accounts.

When you invest in a money market fund, you are lending money to large companies or other entities with the promise of regular interest payments and the return on your original investment at a future date. This is often referred to as “debt security.” Money market funds usually pay slightly more interest than savings accounts, but there’s a small risk of losing some of your initial investment.

Money market funds differ from money market deposit accounts, which are bank accounts. With a money market fund, you’re not depositing into a bank account. Instead, you give your money to a fund manager who invests it in low-risk, short-term debt securities. The manager collects the interest and shares it with all the fund’s investors.

  • Pros:
  • Low risk
  • Greater liquidity compared to bank CDs
  • Higher returns compared to traditional savings accounts
  • Cons:
  • Withdrawal limits
  • Not insured by the FDIC
  • Potential loss of principal

Bonds

When you buy a bond, you typically lend money for an extended period of time. Unlike money market funds, bonds are individual debt securities that local municipalities can also issue. As interest rates go up, bonds can help you earn more. The borrower promises to repay the loan with interest by a specific date.

Some bonds have fixed interest rates, while others have changing rates. People often buy bonds alongside riskier investments, like stocks, to balance their portfolio and reduce the risk of losing everything if one investment type performs poorly.

  • Pros:
  • Low risk
  • Potential for regular interest payments during loan term
  • Legal protection if the borrower fails to repay the money
  • Cons:
  • Shorter terms typically result in lower returns
  • Not insured by the FDIC
  • Requires more research since some bond types are inherently riskier than others

How high-yield savings accounts work.

A high-yield savings account pays more interest than a regular one, but it often comes with specific requirements and limitations. For example, you may need a large deposit to start. These accounts might also charge monthly fees. Limits on how often you can withdraw money without a penalty are common.

Look for an account that lets you start with a small amount of money, pays you the most interest, and charges minimal fees.

  • Pros:
  • Low risk
  • Deposits are FDIC-insured
  • Funds are easily accessible
  • Higher rates of return compared to traditional savings accounts
  • Cons:
  • Large opening balance thresholds
  • Variable rate may decrease along with the Fed Rate
  • Must maintain minimum balance requirements to receive current rates

Rates on fixed-income investments and high-yield savings accounts are not expected to remain high indefinitely. Investing in these options now could ensure your money keeps growing even after rates go back down.

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