3 Things the Middle Class Should Do With Their Cash as Borrowing Rates Hit 18-Year Highs
Borrowing rates have continued to climb amid sticky inflation, oil price fluctuations and speculation that the Federal Reserve may hike interest rates this year. The 10-year Treasury note yield started the year at 4.15% APY and has since climbed to 4.57% APY.
Higher yields mean higher interest rates on mortgages, personal loans and pretty much anything you'd need to borrow for. They can also set the stage for stagflation, since rate hikes tend to slow the economy down without fully taming inflation. Because of this, the financial landscape the middle class has to navigate just got trickier.
Learn More: Grant Cardone Has 4 Ideas To Make Your Money Recession-Proof
For You: Start Growing Your Net Worth With Smarter Tracking
While expenses go up during this time, there are also opportunities to make money as borrowing rates reach 18-year highs. Here are three moves worth making right now.
Compare High-Yield Savings Accounts
High-yield savings accounts let you earn more money on your idle cash than regular checking accounts. However, if you haven’t looked at various high-yield savings accounts for a while, you might still be missing out.
For instance, the FDIC found that the national average APY is only 0.38% for high-yield savings accounts. If you do some more digging, it is easy to find high-yield savings accounts with yields above 2%, with some accounts offering rates above 3%. You can get some of the highest rates by focusing your search on online banks.
You don’t have to stick with the same bank you have been using for several years if its high-yield savings accounts and other financial products are not as good as the competition. Shopping around can be extra lucrative at this time since rates are climbing.
Store Some Money in CDs
High-yield savings accounts are valuable resources that let you access your money right away, but these accounts have variable interest rates. If the Fed cuts rates down the road, your yield drops right along with it.
CDs sidestep that problem entirely. Lock in a rate today, and it's yours for the life of the term, whether that's three months or 10 years. The tradeoff is flexibility: Pull your money out early and you'll get charged a penalty fee. So, only park cash in a CD that you're confident you won't need before it matures.
Want the best of both worlds? Build a CD ladder. Open a six-month CD and a 12-month CD at the same time, and you'll have money freeing up at two different points instead of locking everything away at once. It's a simple way to capture today's high rates without losing all your flexibility.
De-Risk Your Portfolio
Higher interest rates often weaken the stock market. Borrowing gets more expensive for companies, margin rates climb right along with it, and that combination tends to trigger more margin calls. While margin is extremely risky in any economic context, it’s especially bad to have any margin on your portfolio during economic cycles that feature elevated interest rates.
Growth stocks tend to get hit the hardest when interest rates are high. Long-term investors may be able to weather the storm. But if you're planning to cash out any of your holdings within the next year, it might be worth trimming some of that growth exposure now rather than being forced to later.
This matters even more if retirement is on the horizon. Middle-class workers in their 50s and 60s don't have decades left to rebuild a portfolio if the market takes a hit. The recovery window is a lot shorter. Keeping some cash on the sidelines instead of putting it into stocks right away can leave you well-prepared for any corrections.
Bottom Line
Rising rates get a bad reputation, but they're not just a headache for borrowers. They're also an opening for savers. High-yield savings accounts and CDs let your cash finally earn a real return, while trimming risk from your portfolio protects what you've already built. None of these moves require a finance degree or a big life change. They just require paying attention while the rates are actually in your favor.
The middle class doesn't get many windows where sitting on cash pays off. This is one of them. Don't waste it by leaving your money exactly where it's always been.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
More From MoneyLion: