Two financial talking points have dominated our lives in 2022: repeated interest rates hikes by central banks and painfully high inflation.
On November 2, the US Federal Reserve raised interest rates for the sixth time this year in an effort to curb inflation. The European Central Bank (ECB) did so at 0.75% in October with the same objective and warned that this would not be the last increase.
When interest rates rise, it is more expensive to pay off a debt, take out a loan or get a mortgage. But I’m eager to take advantage of these higher-than-usual interest rates that can really benefit my finances this year, even though most people I know are putting off big investments or buying a home until things cool down.
Here are the ways I plan to take advantage of high interest rates before the end of 2022.
1) Find the best savings account
In recent months, as interest rates have risen, some banks have started raising interest rates on high-yield savings accounts.
Since my financial portfolio is very liquid, making sure my money is in a savings account with the highest interest rate can help me earn thousands of dollars of passive income per year.
That is why I am always looking for the best interest rates offered by banks. As of today, my bank has a rate of 2.5%. Others might offer me even more for moving my money into their earning savings account.
Although rates can change at any time, I plan to keep an eye on them over the next few weeks and then decide if it’s worth moving my money from one account to another. If I can get an extra 1% in other entities, I would get a difference of a few thousand euros a year in my account.
2) Invest in bonds
Many of my investments are currently in stocks. But I am seriously considering changing the strategy, because when interest rates go up, the stock market starts to go down. This is because companies will borrow less money when rates are high and the result is that their profits will grow at a slower rate than expected.
One investment I’m considering, for the first time, is bonds. Bonds are fixed income securities in which an investor lends money to a company or a government, for a certain period of time. When interest rates rise, bond prices tend to fall, while still offering a higher yield.
For example, the 10-year US Treasury note currently yields 4%, up from 1.52% last year.
Another bond I want to invest in is the US Treasury I bond. Its annual interest rate currently stands at 6.89%, which represents a decrease compared to the record rate of 9.62% at the beginning of the year. Although this is a good, low-risk way to grow your money, you can only buy $10,000 (which would be about $10,000 at current exchange rates due to parity) in I bonds each year.
Adding more bonds to my investment portfolio, especially when interest rates are high and my money in the stock market is taking a hit, could be a way to diversify my investments and even grow my net worth.
3) Invest in companies with a lot of liquidity
In recent years, I’ve wanted to be smarter about the companies I invest in and, at the end of the year, buy shares in just one or 2 companies that I think will generate decent returns over the next decade.
One type of company to invest in when interest rates rise are highly liquid companies. This is because they earn more from their cash reserves and don’t have to drain their finances by paying high interest rates to borrow money.
When researching these types of companies, it’s good to look for ones with a low debt-to-equity ratio, because they are less likely to experience bankruptcy or loan defaults during a recession or economic downturn. Also keep in mind that your excess cash can show up on your quarterly reports or balance sheets.
Two companies I’m considering investing in are Alphabet and Berkshire Hathaway. Both have a substantial amount of cash and other low-risk securities, investments, and assets. Based on my research, these 2 companies could be a good bet to invest money in, even if interest rates continue to rise.