As interest rates rise in an attempt to cool inflation, many wonder if there is a way to benefit financially during this time of economic uncertainty. Fortunately, there are several ways in which consumers can make the most of high interest rates. Keep reading to learn more about interest and four ways to make the most of high interest rates.
Understanding interest basics
Before making any investment or financial commitment, consumers should understand interest basics and the difference between APR vs. APY. Interest is the price of borrowing money, and all interest is expressed in terms of Annual Percentage Rate (APR) or Annual Percentage Yield (APY). APR represents the amount of interest paid according to a yearly rate, while APY considers compounding-the process by which accrued interest adds to the principal, generating even more interest. So, in short, APR is interest that is added to a debt a consumer holds, such as a credit card or loan, while APY is interest a consumer gains that adds to their earnings.
Why is the Fed raising interest rates?
The Federal Reserve raises interest rates to moderate the amount of cash moving through the economy to drive down aggregate demand and reduce inflation. Inflation is the increase in prices for goods and services over a period of time. There can be several causes of inflation, but it is generally triggered when demand is high, and supply is low-a situation experienced worldwide as the Covid-19 pandemic closed borders and ports and slowed manufacturer production.
Due to this, the Federal Reserve is enacting interest rate hikes in a bid to reduce inflationary pressure and keep the U.S. economy stable.
Ways to benefit from high-interest ratesInvest in Certificates of Deposit: The current high interest rate climate presents an opportunity for consumers to lock in a good return on their investment with certificates of deposit (CDs). A CD is a type of savings vehicle offered by banks and credit unions that holds a fixed amount of money for a fixed period. CDs are a safe investment with a guaranteed rate of return. However, they come with varying maturity periods, and funds can only be accessed after the CD has matured.Invest in Bonds: Investing in bonds is another way for consumers to benefit from high interest rates. Bonds are investments consumers purchase from a government, municipality, or corporation in exchange for guaranteed interest payments. The risk level is generally lower with bonds than other types of investments; however, they can take years to mature, so if consumers need immediate access to their funds, bonds may not be the best option for them.Take Advantage of High-Yield Savings Accounts: Consumers seeking high returns with flexibility should consider investing their savings in high yield savings accounts. These accounts offer higher APYs than those provided by traditional savings accounts, and as rates increase, so too will the amount of interest earned by the consumer. High-yield savings accounts provide a stable and predictable return and have more flexible terms than CDs and bonds, as consumers can withdraw money from their accounts anytime.Maximize Credit Card Rewards: Consumers should take advantage of high interest rates by taking full advantage of credit card rewards programs that offer cash back or other incentives on purchases made with their cards. With the increase in prices, consumers could be able to accumulate more rewards points which can then be used for travel, merchandise, or applied to their credit card balance.
Consumers can make the most of high interest rates in a few ways to increase their savings and possibly build wealth over time. By understanding the difference between APR and APY, as well as taking advantage of options such as CDs, bonds, high-yield savings accounts, and credit card rewards, consumers can make more informed financial decisions that could yield greater returns in the future.
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