Increasing interest rates are good for those who live on the income generated from their holdings. The federal reserve has increased rates for the eighth time in the last twelve months, and most pundits think there are more raises to come.

The key to prospering in this environment is to diversify and to ensure that you don’t get locked into an interest rate that will become non competitive in a short time.

Diversification means placing funds in a wide assortment of instrument including money market funds, short term certificates of deposit, floating rate bond funds, and short term corporate bond funds.

Long term, fixed return investments will be hurt by increases in interest rates, and can even suffer losses in principal value.

Money market rates have increased, some internet banks are offering rates as high as 3.5% on insured money market funds. Laddering certificates of deposit is another effective diversification technique. Buying certificates of varying lengths avoids getting trapped into a fixed rate for all of your available funds.

Higher rates are available, with a bit more risk, with floating rate funds, these are tied to interest rates in a positive way, and will benefit from future increases in rates. Another option is a short term bond fund. These can hurt somewhat by rate increases, but do provide a higher current return than most options.

A new form of immediate annuity provides a guaranteed monthly income with increases in future income tied to interest rates.

Inflation linked bonds are available through the treasury department, and are worthy of consideration, even though they are not short term instruments.