How To Make The Most Of Your Savings As Interest Rates Rise
Interest rates are on the rise, and that's good news for anyone trying to build a nest egg. But where should you get started if you want to make the most of your money? A savings or money market account is an easy option, offering some interest earnings while also keeping your money accessible if you need it.
However, even with interest rates increasing, the interest on a savings account is still one of the lowest rates you'll find. Still, it may be tempting to keep your money in a simple savings account while you see how high interest rates will climb — but all that means is you're earning less now in hopes you might earn more later.
Put your money in certificates to earn now
Fortunately, there's another option that lets you take advantage of today's increasing rates without leaving you behind as rates continue to climb: certificates. Sometimes called certificates of deposit (CDs) or money market certificates, these financial instruments are safe (they're insured by the FDIC or NCUA) and offer a better return than an ordinary savings account. Certificates are simple: you deposit money in a certificate for a certain term, then at the end of the term you get your money back plus interest.
While having your money locked away until the end of a certificate's term may seem like a bad thing in a rising rate environment, short term certificates can help make the most of your money right now. You can get certificates with a short six month term, which lets you invest immediately and then reinvest to take advantage of higher rates after the term is up. The downside to short terms is lower interest rates: longer certificate terms offer the best possible returns. However, even short term certificates can outstrip what you would earn in a savings account to help grow your money.
Start building a certificate ladder for long-term savings
But you shouldn't just think about one certificate. With rates expected to continue rising, it's the perfect time to build a certificate ladder. A ladder lets you start making the most of your money immediately, without completely locking it away. To build a certificate ladder, you invest in multiple certificates with different terms. When each certificate matures — when the term is over — you can use it as needed or re-invest it in a new certificate.
Think of each certificate as a rung in a ladder. You invest in a 1-year, 2-year, 3-year, 4-year, and a 5-year certificate to create five rungs on your metaphorical "ladder." Every year, one of the certificates matures and you get your cash back plus interest. If you put that cash into a new 5-year certificate you add a new rung, continuing to earn.
Of course, this example isn't the only way you can build your certificate ladder. Interest rates on a certificate are locked in when you first invest — which means when rates are on the rise, shorter terms can make more sense. (And similarly, when rates are falling, longer term certificates make more sense.) A shorter ladder — perhaps 3 months, 6 months, 9 months, and 12 months — may make more sense as interest rates continue to rise.
But how you build your ladder is up to you: the terms for each certificate should be what makes the most financial sense for you. Laddering your certificates simply allows you to keep earning over time.
Why invest in certificates instead of stocks?
While you can get better returns by playing the stock market, you can also get worse returns — or even lose your money. Certificates offer guaranteed returns and the security that your money is safe. Certificates are insured for up to $250,000 by the FDIC (if you get them from a bank) or the NCUA (if you get them from a credit union), which means that even if the financial institution goes out of business, you'll still get your money back.
In short, certificates offer peace of mind. With a certificate, you know exactly what's going to happen to your money — and you're guaranteed to get it back.
Consider money market certificates from PenFed
PenFed offers high yield money market certificates that are compounded daily and paid monthly for maximum returns. Terms start at 6 months and go up to 7 years, with higher rates on longer terms. With rates on the rise, there's no reason not to start building your certificate ladder now.