Building Wealth in a High Interest Rate Environment

Key Takeaways

• Short Notes - Including real estate Short Notes is a sound strategy for investing for inflation because they offer short terms, high liquidity, fixed-rate monthly income, and higher-than-average yields.
• Savers, like retirees, benefit during times of inflation because banks pay higher interest rates on their deposits. 
• Investors shouldn't shy away from investing during times of inflation but should instead take advantage of opportunities that keep pace with the high interest rates.

Mention rising interest rates and watch most people groan, shake their heads, or roll their eyes. But a savvy investor knows high interest rates have gotten a bad rap. They understand this environment can lend itself to increased income and better capital allocation.

While interest rates are expected to decline slowly, there is still time to consider investing for inflation. The Fed's short-term interest rates directly influence yields on many investments, and wise investors are considering how to profit from rising interest rates.

The Current State of Interest Rates

The Federal Reserve uses interest rates as a tool to control inflation. If inflation, which is the cost of goods and services over time, increases, the Fed raises the interest rate. Conversely, as inflation declines, so does the interest rate. 

The Federal Reserve's goal is to keep the inflation rate at 2%, and while we're getting closer to the target, inflation is still at 3.3%. Prices have risen 20.8% since February 2020, and it's no surprise that housing is a significant contributor. 

Analysts expect that the Fed will hold the interest rate at the 23-year-high range of 5.25 to 5.5%, which has held steady since July 2023.

What Do Higher Interest Rates Do to the Economy?

The purpose of increasing interest rates is simple - to fight inflation. When interest rates are higher, borrowing is more expensive. In this type of economy, individuals and businesses carefully consider purchases and may be reluctant to take out loans. High interest rates slow down spending, which lowers overall demand and hopefully reduces inflation.

Who benefits from high interest rates? In investment terms, capital allocation becomes more efficient, and resources are put into growing and productive enterprises. High interest rates also benefit savers, including retirees - banks increase their interest on deposits. Payments like Social Security will also tend to rise during this time.

While higher interest rates are good for exploring fixed-income investing, there are also adverse effects. Overall spending is reduced, bond values can decline, and the supply of money is lower.

What to Do Before Interest Rate Cuts

As an investor, you have some decisions to make about investing for inflation. Before interest rates are cut, consider what to do with cash during inflation and evaluate how you can tweak your current portfolio for the best returns. Here are some ideas:

• Utilize high-yield savings accounts - With some research, you'll discover that rates as high as 5.5% APY (annual percentage yield) are offered on some high-yield savings accounts. Banks will follow the Fed's lead when setting interest rates, and with lowered rates anticipated in the near future, now is the time to invest in these accounts while rates are still high.

• Manage/monitor credit card debt and interest rates - Credit card debt comes with high interest rates. Pay attention to the rate you have been assigned, and if you cannot pay off the debt, try to negotiate for a lower one. Credit card interest rates are generally tied to the prime rate, and because of the Fed's moves to control inflation, credit card rates have risen. 

• Refinance debt, mortgages - Mortgage rates peaked at almost 8% in October 2023, and even though they've declined somewhat, they are still significantly higher than they were during the 10 years before the beginning of the pandemic.

Despite current mortgage rates hovering just under 7%, some homeowners would benefit from refinancing. These include those with an adjustable or variable-rate mortgage. They may choose to lock in now instead of risking their rates increasing in the future. Those who took out a mortgage at a higher rate due to their credit score may want to refinance if their financial situation has improved and the new mortgage rate is lower than they have now.

Best Investments for High Interest Rates

Working out where to invest when interest rates rise can be challenging. As an investor, you are looking for good returns with the lowest risk. Here are a few suggestions on what to invest in when interest rates rise.

• Treasury Bills -  Treasury bills, or T-bills, are a good investment. While they don't come with FDIC insurance, they are backed by the Federal government. They are perfect for those wanting to invest more than $250,000 but still want the government's protection. Interest rates hover around 5%, far above traditional savings rates. 

• CDs - Certificates of deposit (CDs) remain competitive, with some offering rates at or over 5% APY. A CD is a fixed-rate investment, which means that from the moment you purchase it, your rate is locked in for the term, and your investment isn't affected by rate cuts. Their specific term lengths tie up your money - usually 3 months to 5 years. There is a no-penalty CD, but most will assess penalties if you withdraw funds early. 

• Cash-rich companies - Investing for inflation includes looking at cash-rich companies that earn more on their cash reserves when rates rise. Seek out companies with low debt-to-equity (D/E) ratios and those with significant cash. Mature companies that hoard cash are also a good choice for where to invest when interest rates rise.

• Floating-rate bonds - If you're an investor who favors bonds, consider bonds with short-term maturity dates or those with coupon rates that move in concert with market rates. Embrace a strategy that invests in various asset classes.

• Short Notes - Connect Invest's Short Notes are short-term, fixed-rate investments offering up to 9%, making them a smart option compared to other investments. Short Notes are designed to make real estate investing accessible to the average investor and work very well for those who want to receive regular interest payments as they save for short-term goals or look for a way to supplement their income.

How to Invest During High Interest Rates With Short Notes

Connect Invest has made its Short Note investing process accessible and streamlined. Our platform is highly user-friendly, and opening an account takes just a few minutes. Of course, our team is available to answer any questions.

• Go to the start-up page to open your Connect Invest wallet.

• Link a bank account to transfer money to your digital wallet. The minimum investment is just $500, and there are no fees.

• Peruse our listings from your dashboard and make your investment selection.

• Begin receiving monthly passive income deposited into your wallet the month after you begin investing. When the Short Note matures, you'll receive your full principal back.

Short Notes offers predictable, fixed-rate, monthly passive income, and the portfolio funded by Short Notes is secured by first-position, collateral-backed loans. Short Notes also aid in capital preservation and have short terms of 6 to 24 months, so your money isn't tied up long-term. They offer high liquidity, hedge against inflation, and aid in diversifying your portfolio.

The proof of the success of the Connect Invest model is found in what our customers have to say. Here are a few testimonials:

"I have been doing short term investments for the past year and getting timely returns. I keep investing now. The owner is easy to communicate with and I feel secure to be a beginner!" - Preethi J.

"Customer Service is quick to respond and very cordial. And so far the company has exceeded my expectations with regards to investment options, customer service, and interest rates. Highly recommend!!" - Michael S.

"Well vetted projects.  Solid returns.  Timely interest payments. This is a trustworthy organization." - Bradley S.

Closing Thoughts 

There is no crystal ball that will tell investors exactly when the Fed will cut rates, but the shift to lower rates is on the horizon. It's not too late to benefit from the high interest rates we've enjoyed since the beginning of 2022. 

Investors wondering how to profit from rising interest rates would do well to get their money working for them in high-yield savings accounts, locking in CD rates, and buying T-bills. Investment strategies should always consider interest rates because they affect both the cost of borrowing and how investments perform.  Short notes and other sound strategies around investing for inflation will put you in a position to see good returns even in difficult economic times.