Savings: How Much Money Has Become in Banks, Credit Unions, and the Preserving Buy-Purpose After Inflation?

Higher rates mean your liquid savings — such as those you set aside for emergency expenses or shorter-term goals like a down payment or vacation fund — can finally earn some money for you after years of earning practically nothing.

Greg McBride of Bankrate.com stated, “Interest rates have increased at the fastest pace in 40 years.” “Mortgage rates have rocketed to 20-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs. If they’re willing to shop around, they’re seeing the best yields since 2008.

If you’ve been stashing cash at big banks that have been paying next to nothing in interest for savings accounts and certificates of deposit, don’t expect that to change much, McBride said.

Thanks to the big players’ paltry rates, the national average savings rate is still just 0.16%, up from 0.06% in January, according to Bankrate.com’s October 26 weekly survey of large institutions.

The overnight bank lending rate goes up when the fed funds rate goes down.

Among the highest-yielding CDs, there are some federally insured one-year CDs with rates as high as 4.85%, well above the current 1.47% national average, McBride said.

Series I savings bonds are designed to preserve the buying power of your money, which makes them attractive given today’s high rates of inflation. They are paying 6.89%.

If you complete your purchase before May 1, you’ll be able to keep that rate for six months. If inflation falls, the rate on the I Bond will fall, too.

There are some limitations. You can only invest $10,000 a year. You can’t redeem it in the first year. And if you cash out between years two and five, you will forfeit the previous three months of interest.

If you don’t need to touch it for five years, they still keep the buying power of your $10,000. They also may be of particular benefit to people planning to retire in the next 5 to 10 years since they will serve as a safe annual investment they can tap if needed in their first few years of retirement.

If inflation proves sticky despite higher interest rates, you might also consider putting some money into Treasury Inflation-Protected Securities (TIPS), said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. TIPS are not Series I Bonds, because they can be sold before the term. They pay a fixed amount of interest each six months. And that rate is fixed at auction but never falls below 0.125%. At the most recent auction in October, for instance, the 5-year TIPS had an interest rate of 1.625%.

What to Expect When the Interest Rate is Going Up: Applying to a Zero-Rate Balance Transfer Card or Home Equity Line of Credit

“This latest interest rate hike will most acutely impact those consumers who do not pay off their credit card balances in full through higher minimum monthly payments,” said Michele Raneri, vice president of US research and consulting at TransUnion.

Best advice: If you’re carrying balances on your credit cards – which typically have high variable interest rates – consider transferring them to a zero-rate balance transfer card that locks in a zero rate for between 12 and 21 months.

Your best bet is to try to find a good balance-transfer card with an initial 0% rate and make a plan to pay off what you owe in the coming months before a high rate kicks in.

The average personal loan rate was 10.71% as of March 8, according to Bankrate. But the best rate you can get will depend on your income, credit score and debt-to-income ratio. Bankrate’s advice: To get the best deal, ask a few lenders for quotes before filling out a loan application.

Freddie Mac stated that the 30-year fixed rate mortgage averaged over 7 percent in the week ending October 27. That is more than double where it stood a year ago.

Don’t jump into a purchase that isn’t the right one for you if interest rates go up. Rushing into the purchase of a big-ticket item like a house or car that doesn’t fit in your budget is a recipe for trouble, regardless of what interest rates do in the future,” said Texas-based certified financial planner Lacy Rogers.

The variable rate on a home equity line of credit or a fixed rate on a home equity loan will rise because their formulas are directly tied to the Fed’s rates. The average home equity loan is running at 8%, which is above the 6.19%) in mid-March of last year. The average rate for a home equity line of credit is 7.76%, which is much higher than last year’s average of 3.96%, according to Bankrate.

Managing the Inflationary Costs of Services: What to Look For in a Portfolio of Stocks, Real Estate, and Financial Services

In terms of inflation, Ma noted, the costs of services – which make up a big part of the Consumer Price Index – is the thing to watch. How sticky the services side of inflation will be is now the big question. Wage pressure is likely to be peaked, but the job market still looks strong and that could keep wage growth elevated for some time to come, Ma said.

He said that with the winter approaching, there is a risk that the energy warfare could escalate again.

Financial service companies can do well in a rising rate environment because, among other things, they can make more money on loans. If there is an economic downturn, the overall loan volume may go down.

Regarding real estate, Ma noted, “the sharply higher interest and mortgage rates are challenging…and that headwind could persist for a few more quarters but we expect stabilization in those markets by year end.”

Small cap stocks have outperformed over the past six months, but Ma remains bullish on value stocks. “We expect that outperformance to persist going forward on a multi-year basis,” he said.

But broadly speaking, Ma suggests making sure your overall portfolio is diversified across equities. You can hedge your bets since some of those areas will come out ahead but not all of them.

If you are intending to invest in a stock, you should consider the company’s pricing power, as well as how consistent demand is for their product. For example, technology companies typically don’t benefit from rising rates. But since cloud and software service providers issue subscription pricing to clients, those may rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Investing in Bonds and Floating Rate Instruments: A Guide for Motivating Investors and Mortgage Investors in the Rise and Fall of Rates

Flynn said there is a good opportunity in short-term bonds. “For those in higher income tax brackets a similar opportunity exists in tax-free municipal bonds.”

Other assets that may do well are so-called floating rate instruments from companies that need to raise cash, Flynn said. The floating rate is tied to a short-term benchmark rate, such as the fed funds rate, so it will go up whenever the Fed hikes rates.

But if you’re not a bond expert, you’d be better off investing in a fund that specializes in making the most of a rising rate environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a strategic income or flexible income mutual fund or ETF, which will hold an array of different types of bonds.

So how come you’re not getting a higher rate on your bank savings? If your money is sitting in a big name bank account, you can save money by using an online bank’s high-yield savings account.

As to where mortgage rates go next, look to inflation. Mortgage rates are expected to drift lower if inflation keeps dropping and reaching the 2% target of the Fed. They will not go back to 3%.

HELOC rates are currently averaging 7.65%, well above the 4.11% average a year ago, according to Bankrate, while the average fixed rate on a 15-year home equity loan is 7.86%.

Allocations in the Emerging Financial Markets, a Commentary on the Fed’s Decelerating Key Interest Rate Rate Revisited

A balanced approach to investment makes sense, even though the outlook for equity and fixed income returns has improved.

Any cash you have sitting on the sidelines might be put into the equity and fixed income markets in regular intervals over the next six to 12 months, he suggested.

The prices of commodities have come down. However, they are still “a good hedge, given the uncertainty in energy markets and the consumption of industrial metals that is needed to facilitate energy transition,” he said.

“We are going longer with maturities now in bonds and extending duration under the guise that at some point this year rates could peak, and then the Fed might be in a position to begin lowering rates. Flynn said it’s important if we have a recession.

If you want a low-risk option, seek out a low-cost investment grade bond fund that primarily invests in bonds with a maturity duration that meets your time horizon (e.g., short term of 1 to 3 years, intermediate term of 5 to 10 years, or long term). Flynn said that if you can stomach some more risk, you might want to consider a flexible or strategic income fund.

Muni prices have dropped significantly and, while they have started to improve, yields have risen overall and many states are in better financial shape than they were pre-pandemic, Flynn noted.

After two weeks of banking turmoil, the Federal Reserve on Wednesday continued its bid to beat down inflation by raising its key interest rate again, the ninth such hike over the past year.

The increase will affect consumers in a number of ways after the US regulators undertook a number of confidence boosting efforts to backstop banks.

Just make sure to choose one that is FDIC insured, so you can rest easy knowing your deposits up to $250,000 will be protected should the bank run into trouble.

An Investment Strategy for Reducing the Risk in Your Portfolio with Implications for Your Credit Card Rate and Borrowing Requirements

Bankrate says that the average credit card rate is currently 20.04%, well above the average of 16.3% for the first four years of this century.

Whether they rise or fall from here, securing a home loan may become tougher since banks, wanting to bolster their defenses against potential adverse events like a run on deposits, may want to take fewer risks and preserve more cash. One way to make borrowing requirements more strict is by making them more stringent.

If you have a long-term investment plan in place, stick with it, he recommends. If you don’t have one, now is a good time to set one up. That includes saving regularly in your 401(k) and investing in a diversified portfolio with exposure to US and foreign equities plus bonds.

If you are considering reducing the risk in your portfolio and taking advantage of higher returns on bonds, you should consider reallocating 2% to 3% out of stocks and into high-quality corporate bonds with no more than five or ten years left in their lifespan.

If you are in a top tax bracket and are investing through a taxable account, you might consider tax-free municipal bonds, or a low-cost, very short-term muni money market fund, Roth suggested.