Pattie Lovett-Reid: How to prepare for risk of interest rate changes in 2020
Over the past year, I have worried about household debt levels, encouraged Canadians to save, and even warned the day of reckoning was coming if interest rates inched higher.
If borrowing costs had risen, that would have had the potential, in my opinion, to tip households into financial failure. I worried that for those living so close to the financial margin, dealing with even a slight rate increase would have pushed them toward insolvency.
In reality, we continued to spend during eight interest rate announcements in 2019, with the Bank of Canada standing pat at 1.75 per cent. The low interest rate environment isn't likely to change in the near future, and despite a recent survey by MNP Ltd. that revealed Canadians are feeling the pinch, bankruptcies in the country remain below 10 per cent.
We have managed to muddle through 2019 relatively unscathed.
This, however, doesn't mean I don't still worry. I worry that the economy isn't strong enough to withstand an interest rate increase. I worry that job losses may happen if the economy slows. And I worry the next move by the Bank of Canada might be a rate cut.
I may have been wrong on the day of reckoning for Canadians in 2019; however, I feel it could still happen if a job loss occur and your standard of living changes in a heartbeat.
In either case – a rate change or job loss – the outcome is the same. Households will be forced to face their own financial facts. Only you know how your family would be impacted given either scenario, or in the wake of another wildcard altogether such as the loss of a spouse or partner.
So on the cusp of 2020, I'm optimistic. Let's hope the economy continues to grow, job creation happens, and incomes inch higher.
However, if that doesn't happen, I'm still hopeful we can all plan for financial freedom, controlling what we can, and increasing the odds of financial success – regardless of the day of reckoning your household may be faced with.
Here are a few considerations.
1. Set family financial goals. Determine where you want to be a year from now. Share the goal, lock it down and write down. Solicit ideas from the whole family on how you will get there and highlight what you are willing to cut out. Get creative: Shop in your own closet, make your own coffee, enjoy a staycation, look at your weekly food budget, negotiate lower contracts, etc.
2. Know your numbers. Cut discretionary spending and redirect savings towards debt. Make this a household challenge. Try paying off the small balance first even though experts will tell you pay of the one with the highest interest rate. Why? Because once you get rid of one outstanding debt, it feels great and momentum builds. Don't get discouraged. It took you some time to get into debt and it will take some time to get out of it.
3. Establish an emergency fund. Start small. Apply for a line of credit or credit for emergency use only.
While I may have been wrong about rising interest rates and the knock-on effect to households this year, it’s still worth having a little financial flexibility in your household in 2020. And I know I'm 100 per cent right about that. I know I'm right about this 100 per cent.