With the exception of perhaps the wealthiest, interest rate increases affect the financial health of many people. But there are also strategies that allow you to take advantage of these increases and thus alleviate the resulting financial stress. Explanations.
The impact of interest rate increases will depend a lot on where you are in your life cycle, explains Stéphanie Castonguay, senior advisor, investment and financial planning, at National Bank. If your situation means that you have savings capacity, take the opportunity to quickly build a cushion that you will invest in short-term fixed income securities, because these already provide good returns.
If you are rather a young family with a burden of debt due to the house and the automobile among other things, hurry to redo a budget which will allow you, by modifying certain elements, to regain control of your finances. During periods of inflation, income generally increases less quickly than expenses, explains Matthieu Leclaire, Private Management, Desjardins. “It’s definitely time to redo your budget,” he says.
This concept consists of creating financial health that allows you to face events while providing yourself with room to maneuver, explains Stéphanie Castonguay. The tool to achieve this is systematic savings. It can be done from the amount that suits you. The main thing is to never stop, explains the advisor. During tougher times, reduce the amount if necessary, but never stop completely. Especially since currently, high interest rates allow this room for maneuver to grow more quickly.
It is possible that rising interest rates will disrupt your financial situation in such a way that you see no way out. If this is the case, Stéphanie Castonguay suggests that you do not wait and consult the experts who will help you put your affairs in order. And most importantly, “do it sooner rather than later,” she says. This exercise will help you better think about your real needs and discover avenues that will allow you to alleviate your financial stress.
For those who have accumulated savings, it becomes important to protect themselves from inflation. Diversifying your investments into fixed income securities will be the way to reduce the volatility of your portfolio, explains Matthieu Leclaire. He suggests using, among other things, guaranteed income investments with different maturities. Bonds will also be a vehicle of choice.
High interest rates should also encourage you to review the tax aspect of your investments, recalls Matthieu Leclaire. Since interest rates have been very low for years, savers have learned not to use their space in registered accounts (mainly TFSAs) for bonds, which offered very little return. Instead, they put stocks where the capital gains were sheltered from tax, even if the tax rate on capital gains is lower than that on interest income. But the situation has changed. “It is therefore important to review the tax efficiency of your registered and non-registered accounts,” concludes Matthieu Leclaire.
