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 cycle of life
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.
PHOTO PROVIDED BY THE NATIONAL BANK
Stéphanie Castonguay, senior advisor, investment and financial planning, at the National Bank
If you are a young family with a burden of debt due to your home and car, among other things, hurry to redo a budget that 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 is certainly time to redo your budget,” he said.
Building financial resilience
This concept consists of providing yourself with financial health enabling 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.
Dealing with financial stress
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 above all, “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.
Protect yourself by diversifying
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 of different maturities. Bonds will also be a vehicle of choice.
We are likely nearing the peak of interest rates, where bonds offer the best yields and their prices are lowest.
Matthew Leclaire
Registered accounts
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 though 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.