How to take advantage of the highest interest rates in decades

Interest rates have been rising over the last few months at a pace we haven't seen since the late '70s. Even for avid market watchers, this fact should cut through the noise and signal we're in a historic new era of high rates.

Understanding how we got here isn't just interesting — it's vital to helping you plan how (and where) to move your money to make sure it's shielded from the challenges of a high-rate environment while taking advantage of higher annual percentage yields. Here are two actions you can take immediately to make the most of this moment, along with an explanation of how we got here and where we may be going.

Right now, the best high-yield savings accounts have interest rates above 5%. "Savings is now very valuable," says Elliot Eisenberg, chief economist at GraphsandLaughs, an economic consulting firm. "If you have savings don't leave it where it used to be, inside a checking account that pays you nothing ... make sure to get good returns on your savings."

UFB Direct has the UFB Preferred Savings account (previously known as UFB Best Savings) which currently offers one of the highest APYs on the market and no monthly fees or minimum balances.

With a Varo Savings Account, you can earn a tiered return based on your balance and whether you receive direct deposits.

The flip side of higher savings account rates is that debt is also more expensive.

As credit card APRs exceed 20%, you may be able to save more by prioritizing paying down high-interest debt. It could also make sense to "borrow other money to pay off more expensive money," Eisenberg says. However, any money you borrow comes with a cost that is only increasing along with interest rates.

A debt consolidation loan can help you bundle together various debts into one, simplified obligation that (hopefully) charges you less in interest than what you were paying on multiple debts. Just make sure the upfront fees for your consolidation loan don't offset any potential savings.

Balance transfer credit cards allow you to transfer debt from multiple cards to a single card with a 0% APR period, which can also be a helpful way of managing expensive debt. If you go this route, make sure you can pay off the debt before and of the 0% APR period, since you'll be on the hook for interest payments after that expires.

The main reason rates increase is because of inflation.

In 2022, the Consumer Price Index crossed 9% for the first time in 40 years. In response, "the Fed started their rate-rising cycle with a vengeance because they were somewhat behind the times," says Eisenberg. "They fell behind the curve, inflation got out of control."

The reason rising rates can curb inflation is that it makes borrowing money more expensive and should limit spending. This has led many economists to forecast a recession in 2023, though that outcome remains far from certain.

Even if the U.S. economy avoids a recession, Eisenberg still predicts a slower economy in the future. "We're not gonna have great growth in '23. There's no way. It's not possible, the high rates are gonna bite," Eisenberg says.

That said, Eisenberg doesn't recommend dramatically altering your life plans. This economic downturn isn't expected to be as severe as the one that followed the financial crisis of late 2007-08. "Don't reflexively think back to the last recession," he says. "This is not that, this is a regular recession."

For anyone who became an adult during the 21st century, today's interest rates are the highest you've had to navigate. For example, mortgage rates crossed 7% in the fall of 2022, which was the first time we've seen mortgage rates that high in over 20 years.

There is no single entity that sets interest rates, however, the Federal Reserve's benchmark Federal Funds Rate has a large influence on rates in general. At the time of this writing, the target for the Federal Funds Rate is around 5%, the highest it's been in over 15 years. And the Fed has indicated that it's not done raising rates, although the pace of the increases has slowed.

While today's rates are significantly higher than they were just a year ago, they don't fall outside of historical norms. During the '70s and '80s, the Fed's benchmark rate topped double digits many times, and mortgage rates climbed into the teens.

Today's rates are at levels we largely haven't had in two decades. That presents both opportunities and challenges.

For savers, or anyone wanting to save more, what you can earn from a high-yield savings account, money market account or CD has increased to over 5%. However, if you have high-interest debt or need to take on debt to buy a house or car, your big purchase has become significantly more expensive in the past year.