3 Ways to Make Today's Interest Rates Work for You

Higher interest rates are a hassle, but they're not always the bad guy. In this article, we'll look at how and why interest rates move from the basement to the penthouse in a matter of months, and examine ways you can profit from high rates.

A global catastrophe

Think back -- way back to 2020. A global pandemic changed the entire landscape of our lives. Governments across the globe were fighting a little-known virus, most without a plan in place. As businesses shuttered and the unemployment rate soared, those same governments worried about their economies. Could an economy survive such a catastrophe?

At first, the idea was to keep the economy rolling along. To help, the Federal Reserve dropped the prime rate. The prime rate is the interest rate banks use to loan money to other banks. It's also the rate banks use to set interest rates for consumer loans, credit cards, and other lines of credit. In short, as the Fed dropped the prime rate, borrowing money became much (much) cheaper for the average consumer.

Cooling off a scorching hot economy

Quite predictably, all that spending led, in part, to inflation. Between June 2021 and June 2022, the Consumer Price Index increased by 9.1% -- the largest 12-month increase since 1981.

It was clear that something would have to be done, and that's where our friends from the Federal Reserve come in. In an attempt to slow spending and lower prices, the Fed slowly began to ratchet up the prime rate. In turn, lenders raised their rates. When one rate hike did little to cool spending, another rate hike followed, and another, and another.

For the average consumer, rising interest rates are a bite in the wallet. And that's the point. The more it hurts, the less we're likely to spend. The less we spend, the faster prices drop.

What's in it for you?

Higher-than-usual interest rates are both a blessing and a curse. If you're looking to buy a home or finance a new vehicle, current interest rates may be standing in your way. If you're looking for fast ways to grow your money, higher interest rates are your ally. Check out these options to make the best of high interest rates.

1. Open a certificate of deposit

A certificate of deposit (CD) is a type of bank account that locks in your money for a fixed period and pays a fixed interest rate. Right now, it's tough to beat some of the rates being offered.

CDs come with a number of perks, including:

• You choose how long you want to keep the money locked in
• CDs issued by FDIC or NCUA member financial institutions are protected for up to $250,000 per depositor.
• CDs are easy to open and understand.

You can sign up for a CD term as short as three months, but here we've gathered a sample of current 1-year CD rates from around the country.

If you're nervous about locking up all your spare cash for a set period, consider a CD ladder. Here's how it works: You deposit money into multiple CDs with varying terms. For example, you may have a CD that expires in three months, another in six months, and so on. That way, you continually have a flow of invested funds available to you if needed. Once a CD expires, you get to choose whether to use the money or reinvest it.

2. Open a high-yield savings account

Typically, traditional savings accounts offer dismal APYs. In fact, they're rarely enough to keep pace with inflation. During times like this, though, financial institutions kick it up a gear by offering much more attractive rates, particularly on their high-yield savings accounts. Like most traditional savings accounts, high-yield accounts are federally insured for up to $250,000. Here's a peek at some current rates:

3. Invest in sectors that tend to do well when rates are high

Some sectors naturally do better than others as interest rates heat up. For example, people continue to need healthcare, no matter what's going on with inflation or the interest rate. It's not like a vacation that can be rescheduled or the purchase of a consumer good that can be postponed.

Another sector that fares well is finance. After all, banks and loan companies profit from high interest rates as consumers are pressed to pay more for loans. In addition to healthcare, speak with your financial advisor about investing in banks, insurance companies, and brokerage firms when rates are high.

There are few guarantees in life, but there are patterns that repeat themselves. Interest rates go up and they go down, depending on what's going on with the economy. You may not enjoy high interest rates, but you can make them work for you.