What rising interest rates mean for you (and how to take advantage of it)

The Fed raises interest rates again by 0.75% 0:59

(CNN) --

The Federal Reserve has increased interest rates on overnight bank loans to a range of 3% to 3.25%, in its continued attempt to stifle inflation.

Consumers are again faced with the question of where to store their savings for the best return and how to minimize their borrowing costs.

This is the central bank's fifth rate hike in six months and the third in a row by 75 basis points, which will put upward pressure on other interest rates in the broader economy.

"Interest rates on credit cards are the highest since 1995, mortgage rates are the highest since 2008 and auto loan rates are the highest since 2012. With more rate hikes yet to come, it will be a further strain on the budgets of households with variable-rate debt, such as home equity lines of credit and credit cards," said Greg McBride, chief financial analyst at Bankrate.com.

"On a positive note, savers are enjoying high yields on savings accounts and certificates of deposit at levels last seen in 2009."

Here are some ways to invest your money to benefit from rising rates and protect yourself from their negative impact.

• The Fed raises interest rates again by 0.75% for the third time in a row

Credit cards: minimize the impact

When interest rates on bank overnight loans, also known as federal funds rates, rise, the various interest rates on loans that banks offer their customers tend to rise as well.

Therefore, expect credit card rates to rise soon.

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Currently, the average credit card rate is 18.16%, up from 16.3% at the beginning of the year, according to Bankrate.com.

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Best advice: If you carry balances on your credit cards, which often have high variable interest rates, consider transferring them to a zero-rate balance transfer card that stays at 0% interest for 12 to 21 months.

"This protects you from future interest rate hikes and gives you a clear path to pay off your debt once and for all," McBride said.

"Less debt and more savings will allow you to better weather rising interest rates, and it's especially valuable if the economy deteriorates."

Just be sure to find out what fees, if any, you'll have to pay (for example, a balance transfer fee or an annual fee), and what the penalties will be if you're late or miss a payment during the term. zero rate.

The best strategy is to always pay off as much of your existing balance as possible, and to do so on time each month before the zero-rate period ends.

Otherwise, the remaining balance will be subject to a new interest rate that could be higher than what you had before if rates continue to rise.

If you don't transfer your debt to a zero-balance card, another option might be to take out a relatively low fixed-rate personal loan.

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Home Loans: Secure a Fixed Rate Now

Mortgage interest rates have risen over the past year, jumping more than three percentage points since January.

The median 30-year fixed-rate mortgage, for example, averaged 6.02% in the week ending Sept. 15, up from 5.89% the week before, according to Freddie Mac.

This is more than double what it was in mid-September last year (2.86%), and notably higher than where it started this year (3.22%).

And mortgage rates could go even higher this year.

So if you're about to buy a home or refinance one, lock in the lowest rate available as soon as possible.

That said, "don't jump into a big purchase that doesn't suit you just because interest rates might go up."

Rushing into a big-ticket item like a home or car that doesn't fit your budget is an invitation to trouble, regardless of how interest rates will behave in the future," said the certified financial planner at Texas, Lacy Rogers.

If you already own a home with a variable-rate home equity line of credit, and used part of it for a home improvement project, McBride recommends asking your lender if it's possible to lock in your rate. interest on the outstanding balance, thereby creating a fixed-rate home equity loan.

Let's say you have a $50,000 line of credit, but you've only used $20,000 for a renovation.

You would request that a fixed interest rate be applied to the $20,000.

If that's not possible, consider paying off that balance by taking out a Home Equity Line of Credit (HELOC) with another lender at a lower promotional rate, McBride suggested.

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Bank savings: look for the best option among the different banks

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If you've been stashing cash at big banks that have been paying next to nothing in interest on savings accounts and certificates of deposit, don't expect that to change just because the Federal Reserve is raising rates, McBride said.

This is because the big banks swim in deposits and don't need to worry about attracting new customers.

Thanks to the paltry interests of the big banks, the average bank savings rate is now 0.13%, up from 0.06% in January, according to Bankrate.com.

The average rate on one-year certificates of deposit is 0.77%, compared to 0.14% at the beginning of the year.

But online banks and credit unions are looking to attract more deposits to fuel their thriving lending businesses, McBride said.

Consequently, they are offering much higher rates and have increased them as referral rates rise.

So look for the best option.

Currently, some online accounts pay up to 2%.

And the most profitable one-year certificates of deposit offer up to 2.50%.

However, if you want to switch, make sure you choose only those banks and online credit unions that are federally insured.

Another high-yield savings option

Given today's high inflation rates, Series I savings bonds can be attractive because they are designed to preserve the purchasing power of your money.

They currently pay 9.62%.

But that rate will only be in effect for six months and only if you buy an I bond before the end of October, after which the interest rate is scheduled to adjust.

If inflation declines, the I bond rate will decline as well.

There are some limitations.

You can only invest $10,000 a year.

You cannot redeem it in the first year.

And if you withdraw it between the second and fifth years, you will lose the previous three months of interest.

"In other words, I Bonds are not a substitute for a savings account," says McBride.

However, they retain the purchasing power of your $10,000 if you don't need to touch it for at least five years, and that's nothing.

They can also be especially beneficial for people who plan to retire in the next 5 to 10 years, as they will serve as a safe annual investment that they can fall back on if they need it in their early retirement years.

If inflation holds despite rising interest rates, you might also consider investing some money in Treasury inflation-protected securities (TIPS), according to Yung-Yu Ma, chief investment strategist at BMO Wealth Management.

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Stocks: Broad Exposure and Pricing Power

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The confusing mix of factors at play in markets today makes it difficult to say which sector, asset class or company will do well in a rising interest environment, Ma said.

"It's not just about rising rates and inflation, but there are geopolitical concerns... And we have a slowdown that may or may not lead to a recession... It's a rare mix, rare even, of multiple factors," he said.

So, for example, financial services companies tend to do well in an environment of rising rates because, among other things, they can make more money on loans.

But if there is a slowdown, a bank's total lending volume could go down.

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So Ma suggests making sure your global portfolio is broadly diversified across equities, with some exposure to commodities, real estate and perhaps even a small amount to precious metals.

"Consider diversifying into areas that have historically done well in environments of rising rates and inflation," he said.

The idea is to consider all the possibilities, since some of those areas will work out, but not all of them.

That said, if you're considering investing in a particular stock, take into account the company's pricing power and the consistency of demand for its product.

For example, technology companies do not usually benefit from higher rates.

But since software and cloud service providers issue subscription prices to customers, those prices can rise with inflation, said certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.

Bonds: short term

401(K) or annuity?

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If you already own bonds, prices will fall in a rising rate environment.

But if you are about to buy bonds, you can take advantage of that trend, especially if you buy short-term bonds, that is, one to three years, since prices have fallen more than usual relative to long-term bonds.

Normally, they go down at the same time.

"There's a very good opportunity in short-term bonds, which are very out of whack," Flynn said.

"For those in the higher income tax brackets there is a similar opportunity in tax-free municipal bonds."

Municipal bond prices have fallen significantly, yields have risen and many states are in better financial shape than they were before the pandemic, he noted.

Ma added that 2-year Treasuries, which are yielding almost 4%, "are attractive as we don't expect the Fed to go much beyond that level with short-term interest rates."

Other assets that may do well are so-called floating-rate instruments of companies that need to raise cash, Flynn said.

The floating rate is pegged to a short-term benchmark rate, such as the fed funds rate, so it will go up whenever the Federal Reserve raises 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 a range of different types of bonds.

"I don't see many of these options in 401(k)s," he said.

But you can always ask your 401(k) provider to include the option in your company's plan.

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