What the Fed’s rate increases mean for your financial plans

The dream of owning a home was pushed further out of reach when mortgage rates doubled this year. Carrying a credit-card balance or borrowing money for a car are also significantly more expensive. Returns on saving accounts, on the other hand, are slowly improving.

With an additional Fed rate increase expected Wednesday, financial advisers say some money decisions, like paying off credit cards, should be treated with greater urgency. Others, such as buying a home, might be better to put off, they say.

“It’s time to make a new strategy, because the old strategies are out the window," said Jaime Peters, assistant dean and assistant professor of finance at Maryville University.

Young people who grew up in a low-rate environment are now feeling the cumulative effect of the Federal Reserve’s monthslong campaign to stamp out inflation with higher interest rates.

They shouldn’t feel that putting goals on the back burner is a sign of failure, Prof. Peters said. “These types of environments won’t last forever. It may mean delaying plans, but it won’t mean canceling."

Here are three strategies financial advisers suggest.

First, pay down high-interest debt.

Americans are taking on more credit-card debt just as the cost of carrying a balance reaches three-decade highs.

“Treat that as an emergency," said Blair duQuesnay, lead adviser at Ritholtz Wealth Management. “The fire needs to be put out because it’s hard to get out from under high-interest consumer debt."

Higher interest rates are driving higher annual percentage rates, or APRs, making it even more costly to carry debt. As of September, total card balances in the U.S. hit $916 billion, according to Equifax, the credit-reporting company. That means balances are closer to their December 2019, prepandemic numbers.

The average APR on credit cards reached 18.73% in October, up from 17.35% at the start of 2020, according to Bankrate. The average credit-card balance is $5,221, according to Experian. At the current rate, someone making the minimum monthly payments on the average credit balance would need an additional three months to pay off that debt, Bankrate said.

In the months following the Covid-19 pandemic shutdowns, credit-card balances plummeted. People cut back spending since more were working from home and had fewer opportunities. The resumption of former spending habits, coupled with high inflation erased the savings many households built up early in the pandemic.

Then, rethink your house hunt.

When interest rates rise, the increase ripples through the economy, leading to changes in mortgage rates that ultimately affect homeowners’ monthly payments.

Higher mortgage rates add hundreds of dollars to monthly payments, making homeownership unaffordable to many buyers and prompting some to put off their search for now. It doesn’t help that starter homes are harder to find across the country.

In October, mortgage rates topped 7% for the first time in two decades. That is more than double the 3% rate Americans could get on a 30-year fixed rate mortgage a year ago, according to Freddie Mac.

The median home sold for $384,800 in September, according to the National Association of Realtors. A buyer who puts 20% down—minus property tax, homeowners association fees and insurance—would have a $2,065 monthly mortgage payment, nearly $750 more than if they had locked in a 3.14% rate at this same time last year.

Delaying the homeownership process for now may hurt at first, but taking the time to save for a bigger down payment could ultimately be advantageous, said Jason Noble, financial adviser with Prime Capital Investment Advisors in Charleston, S.C.

“That is an important conversation to have, because if you are putting down 5%, you could get underwater on your home rather quickly, and we saw that in 2008," he said. “You want to get as close to 20% or over as possible."

Home buyers can reduce their monthly mortgage costs by saving up for a bigger down payment. Home prices could also drop in the meantime, he said.

The downside of waiting is that rents are up 25% over the past two years, according to Apartment List. To cope with these costs, more people now take on roommates or choose to downsize apartments.

And save more money.

Rising rates do have one silver lining: Better returns on your savings. Fed rate increases should lead to higher returns on savings, though banks have been slow to raise rates on standard savings accounts as they aren’t competing for deposits, advisers say. There are high-yield options available, for those willing to shop around.

“I think it’s important for everyone to go check the rate you’re earning on your savings accounts, because some banks are slower than others," Ms. duQuesnay said. “Make sure you’re not letting your cash sit idle."

Eight months ago, holding $1,000 in an account with Goldman Sachs’s Marcus account, for example, meant you would net 0.5% in interest. Now, the same account is offering 2.5% in annual percentage yield.

That means savers earn $25 in interest over a year, compared with $5 at the previous rate. Those numbers might seem small at first—but for those feeling frustrated at delaying the house hunt or putting other plans on hold may find some succor in seeing their savings pile up, Prof. Peters said.

“Being on ice is OK," Prof. Peters said. “If you’re a young millennial, you have time. Take advantage of it. Time is the most valuable asset you’ve got."