Rising Rates? Here’s What to Do With Your Money Now
Let me take you back to last summer. I was sipping iced coffee in my kitchen, scrolling through my banking app, when I noticed something I hadn’t seen in ages: a savings account interest rate above 4%. My jaw nearly hit the countertop. For years, it felt like cash just sat there, politely doing nothing. But now? The game had changed—and it was all thanks to rising interest rates.
If you’ve been wondering whether higher rates are good or bad news for your wallet, you’re not alone. As someone who’s been tracking savings trends for years, I’m here to walk you through the highs, the lows, and the smart money moves you can make right now.
How Interest Rates Really Work Behind the Scenes
Ever wondered why your savings account gets a sudden glow-up or your mortgage becomes less appealing? Here’s the deal: interest rates are more than numbers; they’re the Federal Reserve’s secret weapon for steering the economy. And, as indicated by SmartAsset, the Fed uses interest rate adjustments to manage inflation.
When it climbs above the 2% target, the Fed raises rates, making borrowing more expensive. This slows down consumer spending and business investments, ultimately helping to cool inflation. Breaking it down without the jargon, this section shows you who’s pulling the strings and how it all impacts your financial world.
1. What Are Interest Rates and Who Sets Them?
Interest rates are essentially the cost of borrowing money. They influence everything from your mortgage to your savings account. In the U.S., these rates are heavily shaped by the Federal Reserve (aka "the Fed"), which sets the federal funds rate—the interest rate banks charge each other for overnight loans.
2. The Federal Reserve's Role in Rate Decisions
The Fed adjusts rates to manage inflation and stimulate or cool down the economy. When inflation rises, the Fed often raises rates to curb spending. When the economy slows, it lowers them to encourage borrowing and investment.
3. How Rates Ripple Through the Economy
When the Fed makes a move, it doesn’t stop at Wall Street. Interest rates filter into consumer loans, credit cards, mortgages, savings accounts, and even how companies invest and hire. It’s like a domino effect that touches just about every part of your financial life.
4. The Relationship Between Inflation and Interest Rates
Inflation is the silent budget killer. When it rises too quickly, your money loses purchasing power. Interest rate hikes are the Fed’s main weapon against inflation—but those hikes come with trade-offs, which we’ll get into shortly.
Winners: Where Rising Rates Help Your Money Grow
Not all rising-rate news is bad. In fact, some parts of your financial life could finally be getting the love they deserve. Here’s where higher rates actually help your money grow.
1. Savings Accounts and CDs
Here’s the good news: cash is cool again. After years of earning basically nothing, savings accounts and certificates of deposit (CDs) are finally offering meaningful returns.
When I first started stashing away my emergency fund, I earned 0.01% interest—yes, you read that right. These days, high-yield savings accounts can pay over 4.5%. Some online banks are also pushing CD rates even higher. Tip: don’t settle for your bank’s default rate. Shop around.
2. Money Market Accounts
Money market accounts have also seen a bump. They offer liquidity like checking accounts but with better rates. If you’ve been parking your cash in a no-interest checking account, it might be time for a switch. I personally moved a chunk of my emergency fund into a money market account last year, and the returns are noticeably better.
3. Treasury Bills and Bonds
U.S. government bonds, especially Treasury bills (T-bills), have become more attractive. With short-term rates rising, T-bills are offering solid yields with very low risk. And let’s not forget about I Bonds—they adjust with inflation and were a hot pick for savers in 2022 and 2023.
I helped my retired parents ladder their T-bills recently so they could lock in decent returns without tying up all their money at once. It’s a smart strategy in a shifting rate environment.
4. Fixed-Income Investments
Corporate and municipal bonds are also regaining their shine. With yields on the rise, fixed-income investments are offering better income potential.
You might want to consider individual bonds or bond funds—just know that they respond differently to rate changes. Municipal bonds, in particular, can be attractive for higher-income earners due to their tax advantages.
Losers: Where Rising Rates Create Challenges
Of course, it’s not all sunshine and savings boosts. Some assets—and sectors—take a hit when rates rise. If you’re seeing dips in your portfolio, these could be the culprits.
1. Existing Bond Holdings
Here’s the flip side: if you already hold long-term bonds, you’ve probably seen their market value drop. That’s because, as new bonds offer better rates, older ones with lower yields lose appeal.
It happened to me with a bond fund in my retirement account. I saw the value drop and panicked, but I held tight. If you don’t need the cash right away, it’s often smarter to ride it out—your bonds still pay interest.
2. Growth Stocks and Tech Companies
Growth stocks, especially in tech, tend to struggle in rising-rate environments. Their future earnings become less attractive when investors can get solid returns from safer assets.
I used to have a tech-heavy portfolio. During the last rate spike, I watched it dip more than I was comfortable with. That’s when I started diversifying into dividend stocks and value sectors.
3. Real Estate Investments
Higher rates usually mean pricier mortgages, which can cool real estate markets. Real Estate Investment Trusts (REITs) and even your home value may be impacted.
I paused my home search last year when mortgage rates soared above 7%. It wasn’t just about monthly payments—it also changed how sellers priced homes.
4. Long-Term Fixed-Rate Debt
If you’re locked into a low-rate mortgage, that’s great. But rising rates can make refinancing less appealing and highlight the opportunity cost of your old rate.
My friend refinanced at 2.75% in 2021, and while he’s sitting pretty, he’s now hesitant to tap home equity or relocate. Be mindful of the trade-offs.
Smart Shifts to Keep Your Portfolio on Point
Rising rates call for a rising strategy. You don’t have to overhaul everything, but it’s a smart time to check in on your money moves and make some tactical adjustments.
1. Rebalancing Considerations
With rates rising, it might be time to rebalance. Consider allocating more to cash, short-term bonds, or dividend-paying stocks.
Personally, I’ve adjusted my 401(k) to be a little more conservative, trimming tech exposure and boosting bonds and cash-like assets.
2. Dollar-Cost Averaging in Volatile Times
Instead of timing the market (which rarely works), I stick with dollar-cost averaging. It means investing a fixed amount regularly, no matter what the market's doing.
This approach kept me sane during the pandemic dips and now again with rate volatility. You get more shares when prices drop—a win in the long run.
3. Tax-Loss Harvesting Opportunities
If you’ve got losses in bonds or mutual funds, consider using them to offset gains elsewhere. It’s a smart year-end move I started doing a few years ago, and one that helped me save a few hundred bucks in taxes.
What to Do Now Later and a Bit Down the Line
Not sure when to act? Let’s break it down. Here’s what you can do right now, what to prep for in the coming months, and what to keep in mind for the long game:
1. Immediate Moves (0–30 days)
- Move idle cash to higher-yield accounts.
- Review automatic investments.
- Check your bond fund exposure for duration risk.
2. Medium-term Adjustments (1–6 months)
- Start rebalancing slowly.
- Watch for emerging market opportunities.
- Reassess your risk tolerance as rates continue to shift.
3. Long-term Strategy Updates (6+ months)
- Review retirement plans and allocations.
- Look into estate plans while valuations are lower.
- Check your insurance policies and annuities for rate impacts.
Easy-to-Make Money Moves That Backfire Fast
When rates rise, it’s easy to get reactive. But some moves could hurt more than help. Here are the pitfalls to watch for—and how to dodge them.
- Don’t panic-sell during market dips.
- Don’t chase high yields without understanding the risk.
- Watch the tax impacts of selling assets.
- Forget trying to perfectly time the market.
- Don’t ignore how inflation is still shaping your costs.
What’s Coming Next and How to Stay Ready
Wondering what’s next? While no one has a crystal ball, these signs can help you stay ahead of the curve and plan with confidence.
Keep an eye on these signals:
- Economic indicators like jobs reports and CPI numbers
- Federal Reserve announcements and meeting minutes
- Global economic activity, especially in China and the EU
- Any signs that the Fed might pause or reverse rate hikes
Rate cycles don’t last forever, but being prepared means you can ride the waves instead of getting caught in the undertow.
“In a world of shifting rates, preparation beats panic—stay informed, avoid common traps, and keep your financial footing.”
Savvy Picks!
- Compare savings accounts and CDs to find the best rates—don’t let your money sit idle.
- Rebalance your portfolio to take advantage of safer, better-yielding assets.
- Consider Treasury ladders or I Bonds for steady, low-risk returns.
- Don’t overreact to market volatility—stick with dollar-cost averaging.
- Watch for tax-loss harvesting opportunities before year-end.
The Interest Shift—Now What?
Rising interest rates can feel like a financial plot twist, but they don’t have to throw your entire story off track. With a little knowledge, a few tweaks, and a clear sense of your goals, you can actually use this environment to your advantage.
I’ve made some of my savviest money moves during uncertain times—and you can too.
