What the Fed’s Interest-Rate Increase Means for Our Debt

The Fed continued a more modest 0.25 percentage point rate interest on February 1, 2023. Even this smaller increase will make it more expensive to carry a credit-card balance. Inflation may be cooling, but since rates and prices remain high, this will require us to adjust our financial plans weather this environment and maintain the trajectory of our debt-free journey within 3 years.

Here are strategies we’ll consider in the coming months.

Revisit our Budget

Although a small rate hike isn’t going to move the needle in a huge way, our budget is pretty much set to the penny. We will need to look for flexibility in our budget, increase our income, or it may mean adjusting our timeline for paying off all of our consumer debt.

Recalculate our Debt Payoff Plan

In a higher rate environment, we will take the time to do the math on the front end and see what is the interest over the life of our debts and the true cost of borrowing once the interest rates adjust. This may have us change the priority on which debts are paid off first to make sure we’re paying off debt as fast and as efficiently as possible.

Increase our Emergency Savings

We originally planned to use the extra money I made working OT during my current work travel assignment towards debt. However, we decided it would be best to have more cash to cover any other surprise expenses to avoid potentially putting said expenses on credits cards to make ends meet in a higher rate environment. Typically, an increase in rates means a better yield on savings products. We like to use Marcus by Goldman Sachs for the flexibility of maximizing our savings while still keeping it accessible in case of an emergency.