2022 has been an economic roller coaster, and many investors may be wondering what their next best step should be. While taking the long-term view is always the wisest course, there are moves you can make to take advantage of the current conditions whether you are saving for a short-term goal like a down payment for a house or looking ahead to your eventual retirement.
As the Federal Reserve hikes interest rates to help mitigate inflation, now might be the time to consider alternatives that may offer more lucrative returns when interest rates surge, such as CDs and high-yield savings accounts. Here’s what to know about each of these investment products.
ABCs of CDs
A certificate of deposit (CD) allows you to diversify your portfolio with an investment that has a relatively lower risk than most stocks. When you buy a CD, you are investing a set sum of money for a defined period of time, called a “term,” in exchange for a fixed interest rate you’ll receive at the end. Historically interest rates for CDs climb commensurate with the increase in the federal funds rate, which means these can be an attractive option as they allow an investor to take advantage of today’s rising interest rates. In addition you’ll avoid the volatility inherent in many other investments, since your principal is protected, and CDs offer a guaranteed rate of return after the CD “matures” at the end of the term.
To get the most out of a CD, shop around to find a high interest rate, paired with a term that works for you. If you’re looking to boost your investment strategy today with a high-rate CD, check out Valley’s 25-month CD and lock in your savings at 2.00% APY. You can open this 25-month CD at your local Valley branch.
A strategy investors sometimes use is to build a “CD ladder,” which means you are investing an equal amount of money into separate CDs with various maturity dates and annual percentage yields (APY), which is the amount your investment will earn.
For example, you could start your ladder by investing in a 91-day CD with a .02% yield, a six-month CD with a .03% yield, a 12-month CD with a 0.4% yield and an 18-month CD with a .05%. yield. As rates move up, you can cash out the shorter-term CDs as they mature and reinvest the money into new accounts with a higher APY to lock in those improved yields. While you can’t withdraw the money until the agreed-upon date without a penalty, choosing a CD with a shorter term means the funds are still relatively accessible, should an unexpected financial need appear.
When shopping for a CD, make sure to bank with an institution that’s FDIC-insured to keep your money secure.
411 on high-yield savings accounts
Another savings vehicle that becomes more appealing in a high-interest rate environment is a high-yield savings account, which is an account that earns higher returns than traditional savings accounts. (At Valley, that rate is currently 11 times the national average.)
In times of economic volatility, a savings account has the added bonus of liquidity, which means your money is easily accessible should you need it. As inflation squeezes consumers’ budgets, that means you can withdraw funds to cover unexpected bills. Using a savings account as an “emergency fund” can be a wiser financial move than incurring high credit card interest rate charges or having to pay the fees that often accompany early withdrawals from other savings vehicles. Just remember to keep your eye on the benefits of long-term savings by replenishing the fund as soon as possible.
When comparing high-yield savings accounts, look for a product with low or no maintenance fees to preserve more of your hard-earned money, and make sure your funds are safe by always seeking an FDIC-insured institution.
A prudent approach to managing your investments
In order to reach your financial goals, remember that investment decisions should never be “set it and forget it.” While you always want to take the long-term view, it’s important to remember there are strategies that can allow you to take advantage of variable economic conditions, such as the current higher interest rate environment. By actively managing your accounts, you can reap the benefits of judicious investment options, while working to preserve your gains for the future.
Have questions about banking products or other financial strategies? Contact a Valley banker today.