Pay Debt or Save During High Inflation? Trader Rule

The quiet rule traders use when prices jump

Traders have a quiet rule they use when prices jump: rank every choice by real, after-tax return and move money to the top of the list. It’s not flashy. No green-tinted P&L screenshots. But it’s how desks decide whether to kill a position or sit in cash when inflation’s chewing through headline yields. Same thing works at home, maybe even better, when you’re deciding between paying debt, piling into savings, or topping up investments.

The rule: Line up each option by real, after-tax payoff. Then fund the best one first, next-best second, and so on.

Quick backdrop so we’re on the same page: U.S. inflation spiked hard, headline CPI peaked at 9.1% year-over-year in June 2022, per the Bureau of Labor Statistics. It cooled across 2023-2024, with CPI mostly in the 3-4% range, and this year we’re still running above the Fed’s 2% target. Translation: the real-return game still matters in 2025.

Here’s why the rule works. Two simple points that get missed when rates feel high everywhere:

• Inflation shrinks cash returns. A 4.5% savings yield doesn’t feel like 4.5% when inflation’s 3-something and you owe taxes on interest.
• Inflation softens fixed-rate debt. If you locked a 3% mortgage in 2021, rising prices erode the real burden of that payment. Not saying never prepay, just saying it fell down the list.

Let me make it concrete. Suppose earlier this year your high-yield savings paid ~4.5%. If you’re in a 24% federal bracket, the after-tax nominal is roughly 3.42%. Knock off, say, 3.2% inflation (illustrative) and your real, after-tax return is barely ~0.2%. Compare that to revolving credit. Fed data show average credit card APR on accounts assessed interest hit about 22.8% in Q2 2024 (Federal Reserve G.19). Paying that down is a risk-free 22.8% nominal “return,” untaxed, which, after 3-ish percent inflation, is still ~20% real. That jumps to the top of the list, every time.

Now, fixed-rate vs. variable matters. A 3% fixed mortgage from 2021? With inflation still above 2%, its real cost is low, sometimes negative after inflation. But a variable-rate HELOC priced off prime (which sat around 8.5% much of last year and into this year) can reprice quickly, so it often leaps ahead of “nice-to-have” prepayments or taxable cash parking.

I’m simplifying a tad, yes, there’s nuance with state taxes, deductions, and risk. And I just used the term “real return” like a trader. All it means is “what you keep after taxes and after inflation.” Once you rank decisions that way, the order of operations becomes obvious: kill the expensive variable stuff first, keep cash only up to your emergency need, and be picky about taxable yields that barely beat inflation.

What you’ll get in this section: a simple worksheet-style way to rank your debts and savings by real, after-tax return, a few fast rules of thumb for 2025 conditions, and where this breaks, because it does, when your risk, liquidity, or taxes don’t match the averages.

Inflation math you actually use (not textbook stuff)

Real return ≈ nominal return − inflation − taxes. Same for debt, but flip the sign.

That’s the cheat code I give new analysts. It’s “approx” on purpose, life is messy with timing, compounding, and tax quirks, but it gets you 90% of the way there in 20 seconds.

Quick reality checks using actual history: in 2021, a plain savings account at ~2% vs CPI inflation of 7.0% (BLS, 2021 full-year YoY) gave you a real return before taxes of about −5%. That felt bad because it was bad. In June 2022, CPI peaked at 9.1% YoY (BLS). Even as many credit cards floated into the high teens, real borrowing costs were still very painful, your rate might have been 18%, but when prices jump 9% you still feel squeezed; cash buffers lost purchasing power fast while variable rates kept ratcheting higher.

Now, 2025 feels different, but not simple. Many online savings ads sit in the mid‑4% to low‑5% APY range, while general-purpose credit cards are still in the high teens to low‑20s APR. Prime spent a lot of last year and earlier this year around 8.5%, so HELOCs and other variable lines stayed pricey. The gap between what you earn on cash and what you pay on plastic is, ugly. That spread is the whole ballgame for households.

Here’s how to use the math quickly in 2025 conditions:

1. For cash/savings: Take your APY, subtract expected inflation, then subtract your tax rate on interest. Example: 5.0% APY − 3.2% expected inflation (pick your own estimate; headline CPI has trended in the 3% ballpark at times this year) − 24% federal bracket on the nominal interest (≈1.2% tax on the 5%) ≈ 5.0 − 3.2 − 1.2 = ~0.6% real, after-tax. Not great, not terrible, call it survival yield.
2. For fixed-rate debt: Real cost ≈ fixed APR − inflation. If you’ve got a fixed 3% mortgage and inflation is ~3%, your real cost is near zero before taxes. That’s why I keep saying inflation erodes cheap fixed debt; you can sometimes be patient here.
3. For variable-rate debt: Real cost ≈ current APR − inflation, but with a kicker: the APR can jump. A HELOC at prime + 1.0% (call it ~9.5% when prime is ~8.5%) minus 3% inflation is still ~6.5% real, and it can reprice. This stuff usually outranks almost everything for paydown priority.

A couple of fast rules I use, very “back of envelope,” but they work:

• Taxable cash must clear inflation and taxes to be worth holding beyond your emergency reserve. If APY ≈ inflation, taxes make you negative in real terms.
• Headline APY vs APR comparisons should always be in real terms. A 5% savings headline isn’t beating a 17% card just because both numbers are double-digits. After inflation and taxes, the savings drops; after inflation, the card is still nasty.
• Fixed beats variable, usually, for patience. Fixed-rate debt gets eroded by inflation; variable-rate debt bites harder because it follows policy rates. Timing matters.

Two caveats I’ve learned the hard way: 1) taxes are asymmetric, mortgage interest may be deductible for some, credit card interest is not; state tax can swing the math; and 2) your inflation isn’t the CPI basket. If your personal costs are running hotter (kids, healthcare, rents jumping), your “real” hurdle is higher. Annoying? Yes. Reality? Also yes.

Practical worksheet, try this tonight, takes 10 minutes:

1. List each account or debt with its current APY/APR.
2. Pick an inflation assumption for the next 12 months (I’ll use 3% as a placeholder, adjust to your world).
3. Apply: real after-tax return ≈ APY − inflation − tax on interest. For debts, use real cost ≈ APR − inflation (adjust if interest is deductible).
4. Rank from most negative (worst) to most positive (best). Pay down the worst; fund the best last. It’s boring, but it’s clean.

And yes, I know, there are gray areas: liquidity needs, employer 401(k) matches, short-term goals. Keep those, but don’t let them hide the spread, the spread is where most households leak money.

What to pay first: the 2025 triage list

Okay, I’m going to sound bossy here because, honestly, the math does not care about our feelings. We’ll work the list top to bottom. If something looks harsh, remember we’re minimizing guaranteed losses first and buying ourselves flexibility.

1) Top priority: variable, high-APR debt

• Credit cards, If you carry a balance, this sits at the top. The Federal Reserve’s data shows the average APR on accounts assessed interest was 22.8% in Q4 2024, and it’s still hovering near that range this year. That’s a guaranteed negative return. Every $1,000 not paid is roughly $228 a year in interest burn. Painful, but clear.
• Buy-now-pay-later (BNPL) with interest, Promotional zeroes can flip to interest in the 20-36% APR range if a payment is missed or the promo ends. I’ve watched people go from $0 to “why is this 29.99%?” in a single statement cycle. Treat any BNPL that charges interest like a credit card. Same priority.
• High-rate personal loans, If the APR is double digits, it belongs up here. A 14% personal loan beats prepaying a 4% mortgage all day, every day.

2) Next: adjustable-rate student loans and HELOCs

Variable-rate debt floats with reference rates. When the tide lifts, your payment does too. Prime sat around 8.5% for much of 2024, and even with some rate-cut chatter this year, variable loans remain expensive compared to the pre-2022 era. Private student loans that float off SOFR + a margin have been quoting ranges like 8-12% since last year, depending on credit. HELOCs averaged near 9% in late 2024 by multiple bank surveys, and they move with Prime. If you’ve got a HELOC at Prime, 0.25%, do the quick math: even if Prime eases later this year, you’re still paying something like high-7s to low-8s for a while. That’s… not cheap.

3) Lower in the queue: fixed, low-rate mortgages

If you locked a 30-year at 2.9-4% in 2020-2021, that’s a valuable asset. Prepaying a 3.25% fixed in a world where savings accounts earn around 4-5% pre-tax (earlier this year, top online rates were ~4.5%) isn’t always the best move, especially after taxes and liquidity needs. I’m not saying never prepay; I’m saying it’s usually not the first dollar out the door when you’ve got 20%+ APR plastic breathing down your neck.

Cash buffer stays on

Keep 1-3 months of essential expenses in cash while paying debt. Yes, even if the cards are ringing. Why? Because one medical bill, car repair, or a small gap in pay can shove you back onto a 22% APR card in a weekend. I’ve been there. It’s annoying to keep cash at 4-5% while you’re paying 18-24% on debt, but the emergency re-swipe cost is worse. If cash feels too fat, err toward the low end (1 month) until the highest-rate balances are under control.

Refi and 0% promos can reshuffle

If you can lock a balance transfer at 0% for 12-21 months with a 3-5% fee, the math can temporarily move that balance lower in priority during the promo window. Same with refinancing a variable student loan into a fixed at, say, 6-7% if you’ve got strong credit and stable income. Just remember the clock: when the 0% window ends, that debt snaps back to the top if any balance remains. Put the payoff date on your calendar. Twice.

Quick rule-of-thumb ordering

1. Credit cards / BNPL with interest / double-digit personal loans
2. Adjustable-rate student loans and HELOCs (anything floating near Prime/SOFR)
3. Medium APR fixed loans (auto at 5-8%, smaller personal loans)
4. Fixed low-rate mortgage (especially sub-4%)

Sanity check: if two items are close, choose the one with variable rates or higher fees. And if this feels complicated, yeah, it is a bit. When in doubt, compare real costs: APR minus expected inflation and adjust for taxes where deductible.

Final nudge: automate minimums on everything, throw every surplus dollar at the top line item, and keep that small cash buffer alive. You’re buying optionality and cutting guaranteed losses at the same time. Very unsexy. Extremely effective.

Should you prepay the mortgage when inflation is high?

Short answer that gets me side‑eye on trading floors this year: usually no. Not unless your mortgage rate is meaningfully above what you can earn on safe cash or the debt literally makes you lose sleep. If you locked a fixed 30‑year at 3%-4% back in 2020-2021, inflation already did part of the heavy lifting on your behalf. The Bureau of Labor Statistics shows CPI ran about 8.0% in 2022, roughly 4.1% in 2023, and around 3% in 2024. That sequence quietly shrank the real value of those fixed payments. Prepaying that ahead of crushing cards or floating-rate stuff? Usually backwards.

Flip the coin for newer loans. If you bought in 2023-2024, you probably saw 30‑year fixed quotes near 6%-7%+. Freddie Mac’s PMMS had weekly rates hovering around 7% in late 2023 and much of 2024. That’s a different math problem. When the guaranteed, after‑tax return on prepaying principal can compete with risk‑free cash, it deserves a look.

Quick sanity pass on yields. Through 2023-2024, 3-6 month T‑bills sat near 5% by U.S. Treasury auction results. This year, insured cash and money market funds have still been printing mid‑4s to around 5% in a lot of places (call it ~4.6%-5.0%, give or take; I’m doing this from memory, might be off a tenth). If your mortgage is 3.25% fixed and you can earn ~5% risk‑free before tax, I’d keep the cheap mortgage and let your cash work. If your mortgage is 6.75% and your safe alternatives are ~4.8%, extra principal starts to look competitive, especially after tax.

Key is to compare apples after tax:

• Mortgage after‑tax cost: If you don’t itemize, your cost is basically the sticker rate. And most households don’t itemize since the TCJA; IRS data shows only about ~10% of filers itemized in 2021-2022, similar share in 2023. If you do itemize and your interest is deductible, multiply the rate by (1, your marginal tax rate).
• Cash after‑tax yield: Treasury bills are state tax‑free. A 5.0% T‑bill in a 24% federal bracket is ~3.8% after tax. Bank interest is taxed by both federal and state in most cases, so adjust.

Back‑of‑envelope: 6.75% mortgage vs 3.8% after‑tax T‑bill. Prepaying is a guaranteed 6.75% return (after‑tax if no deduction). Hard to beat risk‑free. Reverse the numbers with a 3.25% mortgage and 3.8% after‑tax cash, you keep the loan.

Where this lands in the real world:

• Low fixed rates (3%-4%): Usually behind high‑APR cards, BNPL with interest, personal loans, and even some auto loans. Keep the mortgage, build emergency cash, kill the expensive stuff first.
• Recent higher rates (6%-7%+): Extra principal can be attractive if your safe, after‑tax alternatives aren’t close. I set up an automatic “13th payment” on my own place years ago when my rate was around 6.5%, not heroic, just steady.
• Adjustable mortgages: Different animal. If it’s floating near SOFR/Prime and resets soon, treat it more like other variable‑rate debt, especially if a refi isn’t on the table.

Two practical add‑ons that get missed:

1. Liquidity first: Prepayments are one‑way. A 3-6 month emergency fund in cash is non‑negotiable. Cash buys time; time prevents forced selling.
2. Behavior matters: If the mortgage balance stresses you out, pay some of it. There’s value in sleeping better that doesn’t show up in a spreadsheet. I’m pro‑spreadsheet, but I’m not a robot. Mostly.

Bottom line this fall: compare after‑tax, risk‑free yields to your after‑tax mortgage cost. If your loan rate clearly beats what you can earn safely, extra principal is a clean, guaranteed return. If not, let inflation keep nibbling, keep your cash cushion, and prioritize the expensive, floating, and fee‑heavy debts higher up the ladder.

Save or invest? Cash buffers, TIPS, I Bonds, and short-term moves

Save or invest? Cash buffers, TIPS, I Bonds, and short‑term moves

Quick reality check for 2025: cash isn’t trash, it’s your shock absorber. If you’ve got toxic, floating, or fee‑heavy debt, keep your liquid cash target modest and tactical: 1-3 months of core expenses while you’re knocking that debt down. Once the ugly stuff is gone, stretch the cushion to 6+ months. And I do mean liquid: checking, high‑yield savings, or a money market fund you can tap without drama. Cash buys you time; time keeps you from selling good assets on a bad day.

Then invest based on time horizon, not headlines, not vibes, and not my hunch on next month’s CPI (I’ve lost a few lunches making those guesses). Here’s the simple map:

• 0-12 months: Stick to T‑bills, high‑yield savings, and money market funds. In Q3 2025, 3-6 month T‑bills are printing in the mid‑4% range annualized, give or take. A lot of reputable online savings accounts sit near ~4% APY. The point is principal stability and easy access.
• 1-5 years: Short‑term Treasuries or short bond funds (1-3 year duration). You’ll take a bit of price wiggle for higher income than savings, but not a ton. Keep fees low; short funds are a commodity.
• 5+ years: Equities and diversified portfolios. Dollar‑cost average monthly. Over this kind of runway, diversified stocks have historically outpaced inflation by around 7% per year before fees and taxes, depending on the period. Trying to time rates or CPI prints is a stress hobby, not a strategy.

TIPS are your inflation‑aware bond. Mechanics haven’t changed since launch in 1997: the principal is indexed to CPI‑U, coupons are paid on that inflation‑adjusted principal, and at maturity you get the greater of adjusted principal or par (deflation floor). That means real protection, your purchasing power is the target. If you want to lock in real yield for longer horizons (say 5-10 years), TIPS can be a smart anchor. Just know: prices move with real yields, so market value can swing even if your real purchasing power is protected over the full term.

I Bonds work differently. They’re tax‑deferred, state‑tax‑free, and the rate resets every six months based on a fixed rate plus inflation. The reason they got so much attention is obvious: the composite rate hit 9.62% for bonds issued May-Oct 2022, then 6.89% for Nov 2022-Apr 2023, and 4.30% for May-Oct 2023. That was after CPI spiked to 9.1% YoY in June 2022 (BLS data). Two big guardrails:

1. Purchase caps: $10,000 per person per calendar year electronically, plus up to $5,000 via a federal tax refund in paper form.
2. Lockup: No redemptions for the first 12 months; redeeming before five years costs you the last three months of interest.

If you want inflation linkage without the purchase cap or the 12‑month lock, that’s where TIPS come back in, pick your maturity, buy in a tax‑advantaged account if you can, and you’re not handcuffed by annual limits.

Principle I live by: build liquidity first, then choose instruments that match the clock you’re on. Horizon beats headline.

Two small notes while we’re here:

• Taxes matter: I Bonds defer federal tax until redemption; TIPS pay taxable income annually (unless sheltered). Money markets/T‑bills are taxed federally; Treasuries skip state taxes.
• Behavior matters (again): If holding extra cash helps you sleep, keep it. Sleep is alpha. If you find yourself market‑timing because your cash cushion is thin, that’s a nudge to rebuild the buffer.

If this is starting to feel overly complex, you’re not wrong, fixed income jargon loves to make simple things sound hard. Keep it practical: emergency cash first, then T‑bills/short bonds for near‑term needs, and equities plus TIPS for longer, inflation‑aware goals. That hierarchy has saved more portfolios than any clever rate call I’ve ever heard on TV.

Taxes can flip the decision (and people forget this)

Two borrowers, same rate, totally different taxes… the math can swing hard. And it’s not theoretical, it’s right now. A 7% mortgage isn’t really 7% if you itemize and the interest is deductible. A 22% credit card absolutely is 22% because card interest isn’t deductible. Same headline, different after-tax reality.

Quick grounding in the rules we still have this year: we’re under the TCJA framework in 2025 unless Congress changes it later this year. The mortgage interest deduction for acquisition debt is generally capped at $750,000 of principal for loans originated after December 15, 2017 (older loans keep the $1 million cap). The standard deduction jumped in 2024 ($14,600 (single), $29,200 (married filing jointly), $21,900 (head of household) ) which made itemizing harder for a lot of households. That’s 2024 data from the IRS. The SALT cap is still $10,000. All of that affects whether your mortgage interest actually reduces your taxes or just sounds nice on a podcast.

So compare after-tax APR vs after-tax APY, not the sticker price:

• Mortgage example: At a 24% federal bracket, if you itemize and the interest is fully deductible, a 7.0% mortgage has an after-tax cost of roughly 7.0% × (1 − 0.24) = 5.32% before any state effects. If you don’t itemize, it’s just 7.0%. Big difference. And remember the SALT cap can indirectly limit your ability to itemize meaningfully.
• Credit card: 22% is 22% after-tax. No deduction. Period. Pay this down unless there’s a literal house fire.
• Cash/T‑bills today: Money market funds and 6‑month T‑bills are around 4.7%-5.1% in Q3 2025 in the real world. Bank interest is taxed by the feds (and states); Treasuries skip state tax. If you’re in a 5% state bracket, a 5.0% Treasury can beat a 5.0% bank account on an after-tax basis because of that state exemption.

Circle back to savings vs debt for a second because this is where people trip. If your HYSA yields 5.0% APY and you’re at a 24% federal bracket, your after-tax yield is roughly 3.8% (ignoring state). If your mortgage is a true after-tax 5.3% as in the example above, prepaying the mortgage is the higher “risk-free” return, unless that cash does more for your sleep, or you need liquidity for, say, a new roof. Sleep still counts.

Now, tax-advantaged accounts throw another wrench, but a good one:

• HSA: Triple tax-advantaged if you’re eligible. Contributions reduce taxable income, growth is tax-deferred, qualified medical withdrawals are tax-free. The IRS limits were $4,150 (self-only) and $8,300 (family) in 2024; they step up to $4,300 and $8,550 in 2025, plus a $1,000 catch-up at age 55+. That’s straight from IRS releases for those years. Maxing an HSA can beat both paying extra on a sub‑6% after-tax mortgage and sitting in cash.
• 401(k)/IRA: Pre-tax 401(k) contributions lower your current taxable income and compound tax-deferred; Roth flips the timing. Over long horizons, even modest real returns outrun inflation. I know that sounds obvious, but in high-inflation years people forget and hoard cash.
• Student loans: Some interest can be deductible (up to $2,500 per year) subject to income limits set by law for the specific tax year. The exact MAGI thresholds change annually, so check the year you’re filing.

One more nuance I almost skipped, APY vs APR. Savings quotes are APY (compounded), loans are APR (usually non-compounded in the quote). After-tax them both before comparing. Example: a 5.1% T‑bill (state tax-free) at a 24% federal bracket has an after-tax yield around 3.88%; a 6.9% mortgage that’s not effectively deductible for you is 6.9%. Apples-to-apples, after-tax to after-tax, and then decide.

Bottom line: always run the after-tax numbers. Headline rates lie. After-tax rates tell the truth, and they often reverse what “feels” right.

Your 30-minute audit: make the call this week

Okay, time to actually do it. Calendar a 30‑minute block today. Pen, one sheet of paper, or a boring spreadsheet if you must. You’re going to line up your money by real, after-tax payoff and stop letting 2025 drift decide for you.

1. Inventory the numbers (no guessing): write each balance, current APR/APY, tax treatment, and whether it’s variable.
   • Credit cards: use the rate for accounts assessed interest if you carry balances. Fed data showed an average around 22.8% in 2023 and north of 23% during 2024. Call it painful, because it is.
   • Savings: the FDIC’s national average savings rate sat well under 1% in 2024 (roughly the 0.4-0.6% range), but many online HYSA were 4-5% earlier this year. Write your actual APY, not what your friend gets.
   • T‑bills: short bills ran ~5% for much of 2024 (3‑month hovered near 5.2% at points). They’re state tax‑free. Note your bracket.
   • Mortgage/HELOC/Student loans: list rate, fixed vs variable, any deductibility that actually applies to you.
   • Inflation: pick the rate you’ll use in planning. If you want an anchor, the 12‑month CPI was about 3.0% in June 2024 (BLS). Today’s print moves month to month, but pick a working figure and stick it on the page.
2. Convert to after-tax, real rates: after-tax APR/APY minus your planning inflation. If your HYSA is 4.6% and you’re in a 24% federal bracket, that’s ~3.5% after tax. Subtract your 3% inflation assumption and you’re at ~0.5% real. Honest math beats vibes.
3. Rank dollars by payoff: biggest positive real return to smallest. High‑APR revolving debt with no tax benefit will sit at the top of the “kill” list. Variable-rate debt deserves extra caution (it can reset higher without asking permission.

Now the actions ) same 30 minutes:

• Kill one high‑APR balance: pick the ugliest card or the HELOC slice that floats with prime and wipe a chunk this week. Even $300 against a 23% card is real money. I know, not glamorous, but it works.
• Cash buffer: fully fund one month of core expenses in cash. This isn’t hoarding; it’s keeping your life from bouncing into 23% APR because a tire blew. If your budget is fuzzy, rough it in and adjust later. Better imperfect and funded than perfect and empty.
• Automate one thing: either extra principal to the right loan (usually the highest after‑tax, variable-rate culprit) or contributions to the right account (401(k) match first, HSA if eligible, then taxable/T‑bills). Automation beats willpower. And yea, 2025 inflation will “choose” for you if cash sits idle too long.

Quick reality check, this gets messy. Taxes vary, state rules differ, and APY/APR conventions aren’t consistent. I sometimes have to re-do a line because I mixed pre‑tax with after‑tax. If it doesn’t fit on one sheet, you’re overcomplicating it. One more thing I almost forgot: write down which rates are fixed and which are variable. In a rate‑cut cycle later this year, fixed doesn’t budge; variable might. That ranking can change, your automation shouldn’t.

Small wins compound. Still true in 2025. One balance down, one month of cash, one automated push, repeat. In six months you’ll wonder why it felt so hard.

Frequently Asked Questions

Q: How do I rank my options, pay debt, save, or invest, when inflation’s still above 2%?

A: Use a simple stack rank by real, after-tax return. 1) Kill high-rate revolving debt first, credit cards around 22% APR in Q2 2024 are a layup. 2) Build a basic emergency fund (3-6 months) even if the real return on savings is near zero. 3) Capture any employer 401(k) match, free money. 4) Then prioritize tax-advantaged investing and only later consider extra mortgage prepayments.

Q: What’s the difference between prepaying a 3% fixed mortgage and leaving cash in a 4.5% high-yield account with ~3% inflation?

A: Prepaying a 3% fixed mortgage locks a risk-free, after-tax return roughly equal to 3% (mortgage interest isn’t deductible for many folks now). Cash at 4.5% sounds better, but after a 24% tax bracket you’re at ~3.42% nominal, and after ~3% inflation the real return is close to zero. The mortgage burden also shrinks in real terms when inflation runs ~3%. In 2025 terms, mortgage prepay slid down the list, but it’s still fine after you’ve hit higher-return moves.

Q: Is it better to max my 401(k) or crush my credit card balance first?

A: Short answer: crush the card, then max the 401(k). Longer answer with numbers. Credit card APRs averaged about 22.8% for accounts assessed interest in Q2 2024 (Fed G.19). Paying that down is a risk-free, after-tax “return” near 22.8% nominal, which still clears 20% real when inflation sits around 3% this year. No legal investment gives you that guarantee. So:

• Step 1: Keep a minimal emergency buffer (say one month of expenses) while attacking the card. I know that sounds tight, but interest at 20%+ eats your lunch.
• Step 2: Always grab your employer 401(k) match while paying down the card. Skipping a 100% match on the first few percent of pay is… let’s call it suboptimal.
• Step 3: After the card is gone, raise the emergency fund to 3-6 months.
• Step 4: Max pre-tax or Roth contributions depending on your bracket and expectations. High earners in 2025 still get strong value from tax deferral; lower brackets might prefer Roth for future tax flexibility. Personal note: on the desk, we’d never hold a position with a guaranteed negative carry this large. Same logic at home, kill the costly debt, then go heavy on retirement.

Q: Should I worry about taxes when I choose where to park cash right now?

A: Yep, absolutely. Interest from savings is taxable, so a 4.5% yield in a 24% bracket nets ~3.42% before inflation, basically flat in real terms with ~3% inflation. Consider tax-advantaged spots first: 401(k)/IRA contributions, HSA if eligible, and even I Bonds (when rates are reasonable) for tax deferral. After that, keep cash for safety, not for “returns.” And please don’t forget state taxes.

@article{pay-debt-or-save-during-high-inflation-trader-rule,
    title   = {Pay Debt or Save During High Inflation? Trader Rule},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/pay-debt-or-save-inflation/}
}