Interest Rates Have Gone Up, What’s Next?
August 11, 2023
Over the past year and a few months, there has been a significant increase in interest rates. This change has led to a lot of people looking for short-term places to invest their money.
The government body called the Federal Reserve has temporarily stopped raising interest rates to help control the rise in prices (known as inflation). But this stop is expected to be brief, and experts predict that interest rates might go up again by a small amount soon.
What Can You Invest In Now?
There are several safer investment options now, including:
- Certificates of Deposit (CDs): These are like savings accounts but with a fixed term and usually a higher interest rate.
- Money Market Funds: These funds invest in short-term debt and are considered to be relatively safe.
- Short-term Treasurys: These are government bonds that have short maturity dates.
- Long-term Bonds: These can include government or company bonds.
For example, Blackrock, a big investment company, has seen clients add a huge amount of money to these kinds of investments recently.
Why Are People Looking at These Investments?
Interest rates have become much more attractive, making these options appealing. As the CEO of Performance Wealth, Thomas J. Salvino, puts it, investments like the U.S. Treasury bill have gone from earning very little to earning 5.4% per year. Plus, they’re considered safe because they’re backed by the American government.
Cash Alternatives Are Worth Considering
With interest rates rising, other options like U.S. Treasury bills and money market mutual funds can offer attractive short-term interest rates. These can be good for earning interest while you plan for the long term, and Treasury bills even offer some tax benefits.
What Should You Watch Out For?
After some banks failed, many wealthy Americans moved their money into safer government-backed options. However, you should remember that non-government investments may still be taxed.
Also, earning too much interest could put you into a higher tax bracket. As Bruce Primeau, a financial expert, explains, you might end up paying a lot in taxes on the interest from certain investments.
Think About What to Do with Extra Cash
You might want to pay off higher-interest debt instead of investing all your money. For example, paying off a mortgage might be more beneficial than putting that money in a portfolio.
Be Careful with Fixed-Income Investments
Not all investments are as safe as they seem. In the past, some investors have lost a lot of money by going after higher returns in risky companies.
Higher interest rates can also impact the value of long-term bonds, and corporate debt may become more expensive for companies to deal with.
Think About the Bigger Picture
With inflation around 4% to 6%, fixed-income returns may not seem as impressive. Investing in successful companies that meet global needs might be more rewarding in the long run.
Need Help with Your Financial Planning?
If you need help understanding these changes or planning your financial future, don’t hesitate to reach out to Shah Total Planning. Our experts are here to guide you and make sure you make the most of your money.
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