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The author, Jen Glantz.
Courtesy Jen Glantz
To bring down sky-high inflation, the Fed has repeatedly raised interest rates in 2022.
That makes it expensive to borrow cash, but it’s a good time to look for a new savings account.
I’m also considering buying bonds for the first time, and investing in cash-rich companies.
Two financial conversations have dominated American life in 2022: the Fed’s repeated interest rates hikes, and painfully high inflation. On November 2, the Federal Reserve raised interest rates for the sixth time this year, in an effort to slow inflation.
When interest rates rise, it can become more costly to pay off debt, borrow cash, or get a mortgage. And while some people I know are holding off on making big purchases or buying a house until things cool down, I’m eager to capitalize on these higher-than-usual interest rates that can benefit me this year.
Here are the ways I’m planning to take advantage of high interest rates before the end of 2022.
1. Shopping for the best savings account
Over the last few months, as interest rates have gone up, some banks have started to increase interest rates on high-yield savings accounts.
Since my financial portfolio is very cash-heavy, making sure my money is in a savings account with the highest interest rate can help me bring in thousands of dollars of passive income a year.
Which is why I’m always shopping around for the best rates offered by banks. As of today, my current bank has an interest rate of 2.5%. Other banks are currently offering more, like CIT Bank Savings Connect (3.25%) and UFB Elite Savings (3.16%).
While these interest rates can change at any point, I plan to monitor the rates over the next few weeks and then decide if it’s worth it to move my cash. If I can get an extra 1% somewhere else, that could be a difference of a few thousand dollars a year.
2. Investing in bonds
A lot of my investments are currently in stocks. However, I’m eager to change that, since when interest rates rise, the stock market starts to decline. That’s because companies will borrow less money when rates are high and the result is that their earnings will grow at a slower-than-anticipated rate.
One investment that I’m considering, for the first time, is bonds. Bonds are fixed-income securities where an investor lends money to a company, or the government, for a set period of time. When interest rates rise, bond prices tend to decrease, while still offering a higher yield.
For example, the 10-year treasury bond is currently yielding a rate of 4%, compared to 1.52% last year.
Another bond I’m looking to put money into is I bonds, from the US Treasury. Their annual interest rate is currently at 6.89%, down from a record high rate of 9.62% earlier this year. While this is a good, and low-risk, way for money to grow, you’re only allowed to purchase $10,000 worth of I bonds each year.
Adding more bonds to my investment portfolio, especially when interest rates are high and my cash in the stock market is taking a hit, could be a way to diversify my investments and even grow my net worth.
3. Investing in cash-rich companies
Over the last few years, I’ve wanted to get smarter about the individual companies that I invest in and, by the end of the year, buy stock in just one or two companies that I believe will generate a decent return over the next decade.
One type of company to invest in when interest rates rise is cash-rich companies. That’s because they earn more on their cash reserves and don’t have to drain their finances paying high interest rates to borrow money.
When researching these types of companies, it’s good to look for ones that have a low debt-to-equity ratio, because they have a lower chance of bankruptcy or loan defaulting during a recession or economic downturn, and companies that have an excess of cash, which you can find when you look into their quarterly reports or balance sheets.
Two companies I’m considering investing in are Alphabet and Berkshire Hathaway. Both have a considerable amount of cash and other low-risk securities, investments, and assets on hand. Based on my research, both of these companies seem like good bets to invest money into, even if interest rates continue to rise.