As the Federal Reserve Board raises interest rates, there are a lot of downsides. Higher interest rates on credit cards, automobile loans, and mortgages make taking on these loans somewhat of a challenge. However, there are benefits to the Federal Reserve Board raising interest rates. We get higher interest rates on our money! What I have found is that people don't know where to go to find these higher rates. It really depends upon your time frame.
For a year or less, the battle is between bank CDs and high-yield money markets - which is just a fancy way of saying savings accounts. Banks are trying to compete with high-yield money market rates by offering attractive one-year CD rates. However, you have to know how much you are truly getting on your money. For instance, there is a big difference between a one-year CD that pays 5% for 12 months versus 5% for 13 months. With the 13-month option, you are not getting a one-year CD for 5%, as the marketing makes you think. Banks are reluctant to guarantee higher interest rates beyond 12 to 13 months.
High-yield money market accounts are paying as high as 5% as I write this. There are no restrictions like a CD has; however, rates can vary in a high-yield money market account. You can find these higher-paying money market accounts at places like Fidelity and Vanguard.
One word of caution - banks are still getting away with paying minimal interest on some accounts, and high-yield money market accounts are doing the same. It's important to know the going interest rates before you commit.
What about longer guaranteed interest rate-driven accounts? If you want long-term, fixed annuities are the way to go. A fixed annuity is nothing more than a CD. The fixed annuity locks in an interest rate and guarantees to pay you for a certain amount of time. Once that period lapses, you can move the money or renew it. Let me give you a few examples of longer-term, higher interest-rate products.
There is a 3-year guaranteed interest rate product paying 5.25% per year.
There is a 10-year guaranteed interest rate product paying 6% per year
A word of caution - these rates are competitive, and not every company pays them. To my knowledge, only one insurance company is paying the 10-year guaranteed interest rate of 6% per year. Then, you also have to ensure you are investing your money with a sound insurance company with good ratings.
The bottom line - make sure you're getting the best rate possible for everything from your short-term emergency money to your long-term investable money.
If you need any help locating the right interest rate account for your situation, please email us at info@prudentmoney.com, and we can guide you in the right direction.
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