Do you wonder where to save and invest when the interest rates are still rising?
In this post, I list some of the options I have looked at, used myself, and thought would be worth sharing with you all. This post is about savings and investment options in the US. But even if you are not from the US, some of the info will still be of good value to you if your country is experiencing interest rate hikes, so please continue reading till the end.
I would start with the safest option – the US treasury bills. These are currently paying between 3.9% and 4.6% annual interest, a significantly higher rate than what they did in the past 5 years.
Below is the chart I got from St. Louis Fed, where you can see the interest rate on 4 weeks’ T-bills in the last 5 years. As you can see from the chart, the interest rate has been growing since March 2022.
What are T-bills and are these a good investment option right now?
For those of you who do not know what T-bills or treasury bills are, these are short-term borrowing of the US government from the people. These are backed by the complete faith of the US government, and thus, are virtually risk free.
The US treasury’s official website called treasurydirect.gov auctions new T-bills twice a month with the duration of four weeks, eight weeks, 13 weeks, 17 weeks, 26 weeks, and 52 weeks. On their website, they publish this table showing the current interest rates for each t-bill. As we would expect, they pay slightly higher interest with a longer duration.
When and how do T-bills pay?
T-bills are always issued at a discount to the par value and pay interest and the principal at maturity. What it means is that if you want to buy $100 worth of T-bills, you will actually be paying less than $100 now. Suppose you buy them for $95, and once the bill matures you will get the full $100 back. So the difference between the $100 and $95 is the interest that you earn, in this example it is 5%.
One of the tax advantages of T-bills is that they do not incur state or local income tax. However, you have to pay federal income tax on the interest earned.
Another benefit of investing in short-term T-bills such as 4 weeks or 8 weeks, is that these are relatively liquid investments. So this is something to consider if you have extra cash sitting in your savings account, you can move some of it to invest in 4 weeks t-bills, as a part of your emergency fund.
Also, there is no maximum amount of investment that you can do in T-bills. It can be up to millions of dollars, unlike the series I-bonds, which I will discuss next.
What are I-Bonds?
Government-issued I-bonds (also called treasury savings bonds) hit the headlines this year for a record high-interest payment. If you bought series I bonds between the end of April 2022 to the end of October 2022, they paid 9.62% annual interest.
I-bonds are mainly for long-term investment for 5 years or more. The interest we earn from them comes from a fixed rate and a variable rate. The variable rate is adjusted twice a year based on the inflation rate. As inflation rises or falls, the variable rate moves in the same direction to offset it. So they are inflation-protected.
I-bonds can earn interest for as long as 30 years or until you cash it out. They are also perfectly secure as they are backed by the U.S. government.
The current interest rate valid for the next 6 months for I-bonds is 6.89% on an annualized basis. It is almost 3% lower than what it was a few months ago, but it is still not bad compared to last year.
I bonds are not liquid as they need to be kept for a longer duration such as 5 years. If you withdraw the money before 5 years, you will lose 3 months of interest rate.
Also, keep in mind that i-bonds are not for emergency funds, as they are not liquid in short term. You can’t cash them out before 12 months.
Also, the maximum investment per person is only $10,000 per year, and up to $5,000 in the paper I bonds (with your tax refund).
High yielding Savings account
The next option would be to save your money in some high-yield saving accounts like Marcus by Goldman Sachs, and Capital one. These accounts don’t have any minimum balance requirements and monthly fees and pay 3% or more currently. These are also FDIC-insured. Below is the table I compiled using Bankrate data showing the different options.
| Bank | APY | Monthly Fees | Minimum balance | Additional Notes |
| Citbank | 3.6% | $0 | $0 | |
| Upgrade | 3.5% | $0 | $1000 | Upgrade is a financial technology company, not a bank. Premier Savings accounts are provided by Cross River Bank, Member of FDIC. |
| SoFi | 3.25% | $0 | $0 | |
| LendingClub | 3.25% | $0 | $0 | $100 to open an account. A min balance of $2500 needed to earn top APY |
| Marcus by Goldman Sachs | 3% | $0 | $0 | Marcus has a competitive yield on its savings account and only requires $1 to earn a competitive APY |
| CapitalOne | 3% | $0 | $0 |
Stock Market Investing
As I have said before, the best approach would always be to invest in a broad-based index fund or an ETF, rather than investing in individual stocks. This is especially true for risk-averse investors. Index funds are a great way to diversify your portfolio, which even the seasoned investor, Warren Buffett recommends.
Some of the index funds that I personally like and have invested my money in are Vanguard S&P 500 Index fund VFIAX, and Vanguard value index fund VVIAX. By following dollar cost averaging, you take away the emotional factor of investing and don’t get impacted by market fluctuations. Over the long run, the index fund that mimics a broad index should do as well as the market and will yield a return of 10-12% a year.
The stock market can go up and down for various reasons. It could be related to macro economic factors like changes in interest rates and inflation, but it is very hard to predict that. However, over the long run, all the leading stock indices, like S&P 500, NASDAQ, and Dow Jones have done great in providing great returns, as you see in the three charts above.
Also, if you want to compare how the market has done, as measured by the return on S&P 500 vs the inflation rate as measured by CPI, you can see the chart below. The market fluctuates, as we see from the blue line peeks, but most of it has been positive peeks, with the exception of a few years. Thus, over the last 50 years or more, on average, the annual market returns have been much greater than the inflation rate.
Real Estate Investment
If you are thinking of investing in a real estate, the question is whether you should buy a house now or should you wait. Well, I would say that if you could wait a little bit longer maybe after the next six months that would be a better time.
The next interest rate hike is most likely going to happen at Fed’s December 14 meeting. In their last meeting on Nov 2, the Fed indicated that the interest rates will continue to rise until the US economy returns to the desired inflation rate of 2%. To learn more about how Fed works, please stay tuned for my upcoming post.
Because the interest rate will keep going up in 2023, the demand for houses will likely fall. Once the demand for houses is low, the price of houses will also decline further.
The interest rate would still be high probably for the next 6 to 9 months but when they start dropping you can always refinance it.
Conclusion
But let me close by saying, with rising interest rates, the first thing you should do is pay off any type of credit card debt if you have one. If you look at the rates compiled by the Bankrate website, the average credit card rate is 19% as of Nov 30, 2022. So yes, before you invest anywhere, please take care of that.
