High Interest Rates Are A Golden Opportunity For Beginner Investors

Grow your money with a lot less risk and boost your confidence as a new investor with the help of high interest rates.

As a financial educator who has more than $1 million set aside in investments and doesn’t like to take on unnecessary risk, I’m excited to see simple ways you can increase your cash flow with minimal investing experience necessary.

What Does It Even Mean That Interest Rates Are High?

When you hear about the Federal Reserve raising interest rates, it’s a reference to the federal funds rate, also called the federal funds target rate. The Federal Open Market Committee, a 12-member committee that assesses economy and policy options, regularly sets a range for the federal funds rate. This is a guideline for the interest rates commercial banks charge each other to satisfy liquidity requirements set by regulators.

The average of the rates banks charge for overnight loans is called the effective federal funds rate, which impacts what they charge for other types of debt, and influences interest rates all across the world economy.

Before you jump into riskier bets like stocks, mutual funds or hard assets like real estate, consider these three ways to grow your money first.

Old-Fashioned CDs Are Making A Comeback

One of the oldest banking products in the world, a certificate of deposit is a savings account that holds a fixed amount of money for a defined period of time, such as six months, one year, or five years. When you cash in your CD, you receive the money originally invested plus interest paid by the bank.

CDs are widely considered to be among the safest savings options, and insured up to $250,000 if the bank is federally insured. The insurance covers all accounts under your name at the same bank in total. It does not cover $250,000 for each CD or account you have at the bank.

For a fixed-rate CD, you risk losing money if the interest rate goes up, but you can’t lose money that was never yours to begin with. However, your rate is locked in even if interest rates go down during the holding period, so you have a consistent rate of return with no extra work.

Some personal finance experts might argue it’s a savings account and not an investing vehicle. But based on the pure definition of investing — putting money in with the expectation of getting more money out — CDs can have as much as 5% rates right now, competing with investments such as dividend stocks that have similar returns with more potential risk.

I personally have opened several CD accounts since the beginning of the year. I find it’s a great place to save cash I don’t need in the short term, such as saving for the down payment on my next home and money set aside for vacations in 2024.

The downside is you will get a penalty in interest if you withdraw early, so it’s not a place to store emergency funds or money you’ll need to access quickly.

You Can Loan The U.S. Government Money With Treasury Bills

Treasury bills are IOUs issued by the U.S. Department of the Treasury. Not to be confused with Treasury bonds or Treasury notes, T-bills have the shortest maturity date of all the debt issued by the U.S. government, which can be as little as a few months.

Because these are short-term debts you are loaning to the U.S. government versus a private entity, Treasury bills are generally considered to be risk-free. Another benefit is T-bills are only subject to federal taxes, not state and local. Many other investments like the CDs will be considered income both for federal and state tax purposes.

While you aren’t going to get rich from investing in T-bills, they’re a great way to start getting used to letting your money go and practice growing your risk tolerance.

I also add this caveat: T-bills are not intuitive to buy, and TreasuryDirect, the government’s website for purchasing its securities looks like it hasn’t been updated since the early 2000s.

There’s a little learning curve in how to purchase them. I bought mine through a brokerage account such as Fidelity, Vanguard or Schwab so that I could avoid the hassle of remembering my TreasuryDirect credentials. Plus, I readily view them alongside my other investments in my cell phone apps.

Pay Off Your Car Loan To Increase Your Monthly Cash Flow And Invest

Aside from your rent or mortgage, your car loan is likely the next highest expense in your budget. Rising interest rates are keeping average monthly payments above $700.

The average interest rate for new-vehicle loans is an estimated 6.7% in March 2023. So if you’ve bought a car and financed it recently, chances are your interest rate is higher than any return you’d get on most investments that are accessible to a beginner.

Paying off your car loan would also help you reduce your personal risk. Should you lose your job, you’d need less money to cover your bills.

Your car arguably is not an investment, as most vehicles lose value as soon as you drive them off the lot. But thanks to supply shortages, some cars have been selling for more than their sticker prices, making them a short-term investment for the sellers.

It may seem like a lofty goal, but paying off your car helps increase your monthly cash flow by removing that line item from your budget. You can think of it like an investment by saving the amount you would have paid in interest.

Even an extra $100 per month can shave off years from your car loan, and there’s no extra risk or skills necessary to pay it off sooner.

High interest rates are generally terrible for borrowers. But if you’re a new investor who has been timid in the past, they’re a golden opportunity.

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