Rising rates, rising rewards: 7 ways to supercharge your savings

Over the past 18 months, the Fed has implemented one of its most aggressive interest rate tightening campaigns in the organization's history.

For borrowers, this means costly monthly debt obligations. But for investors, this can be the opportunity of a lifetime.

Why? Well, stocks are risky, and keeping your cash in a conventional savings account risks eroding its value. After all, interest rates are only as high as they are because the Fed is trying to tame inflation.

Thankfully, higher interest rates help drive increasingly attractive—and safe—investment opportunities.

Keep reading to learn some of the best places to park your rainy day fund to help ensure you don’t just protect it; you grow it.

The relationship between risk and time horizon

With investing, conventional wisdom says that the more time you have, the greater the risk you can take. For example, the younger you are, the more aggressively you can invest your retirement savings.

Why? Because of volatility.

In finance, risk is synonymous with volatility. Volatility measures the dispersion of returns for a particular asset, like a stock.

For example, shares that trade between $10 and $20 in a single day would be considered more volatile and riskier than a stock that moves in a narrower range of between $14 and $16.

All else equal:

• The longer the time horizon, the more risk you can incur
• The shorter the time horizon, the less risk you can incur

Risk and savings

If you plan to buy a car in six months, you want to ensure you have sufficient savings available when the time comes.

If you invest the savings meant for your car purchase in a very volatile security, you run the risk that the asset you've invested in will be substantially down when you find the car and need the money.

Of course, the opposite is also true. You may end up with substantially more money than needed. That’s a good thing, but it’s a gamble and not guaranteed.

Now imagine an emergency fund where the stakes are even higher. With an emergency fund, you have no idea when the funds will be needed.

You might need that money in a few months, a year, or next week if an emergency strikes.

That’s why emergency savings are usually best held in less-risky assets (lower-volatility assets). Unfortunately, these relatively safer securities typically generate lower returns.

In today’s environment, however, that’s not the case. Some of the most conservative (safest) assets are generating exceptional returns. Today, investors can invest in assets that provide attractive, secure, and consistent income.

7 ways to supercharge your savings

High-yield savings accounts

Most banks and credit unions offer high-yield savings accounts to park your cash. They are considered secure because they are typically FDIC or NCUA insured up to applicable limits.

Like all the securities listed in this article, high-yield saving account interest rates tend to follow the trajectory of Fed policy. As a result, amid the rate tightening over the past year and a half, high-yield savings accounts have experienced surging rates.

High yield typically refers to anything generating 2.5% or more. In today’s market, it’s not uncommon to find financial institutions offering 4% or even higher.

Rates this attractive have been unheard of during the past decade-plus.

Money market accounts

Money market accounts are similar to high-yield savings accounts but often have additional features. For example, money market accounts often permit clients to write checks.

And like high-yield savings accounts, money market accounts are also usually insured by the FDIC or NCUA.

Money market mutual funds

Money market mutual funds are securities that invest in short-term, high-quality securities. Typically, they are structured to maintain a stable $1 per share value.

Unlike money market accounts, money market mutual funds are not insured by the FDIC or NCUA. Even so, they are considered a conservative and relatively safe investment.

Short-term certificates of deposit (CDs)

Certificates of deposit are time deposits. This means they have fixed terms or periods.

CDs are similar to savings accounts but include the time commitment. As a result, they often come with higher interest rates than savings accounts. The longer the period, the higher the interest rate.

Sometimes, people will “ladder” CDs for their emergency savings. This means savings are divided among CDs with varying terms. This provides a balance between maintaining some liquidity and earning a higher return.

Ultra-short-term bond funds

These are mutual funds that invest in very short-term fixed income. While they usually provide higher yields than money market funds, they are considered more volatile and thus riskier.

I bonds

I bonds are inflation-protected savings bonds issued by the U.S. Treasury. They work by adjusting their interest rate with fluctuating inflation.

Because today’s high-interest rate environment is a reaction to high inflation, I bonds are generating reasonably high yields.

The current composite rate for I bonds is an attractive 4.30%.

Treasury inflation-protected securities (TIPS)

TIPS are not unlike I bonds, except they work by adjusting the principal value in line with changing inflation. While I bonds have a changing interest rate, TIPS’ interest rates remain static.

Next steps

Regardless of where you decide to park your money, nothing is guaranteed. All investments, no matter how they've performed historically, entail some degree of risk.

Even Treasuries backed by the U.S. government can fail, even if the likelihood of that happening is exceedingly low.