Interest rates have increased dramatically recently and many people are experiencing them for the first time. This new reality brings challenges and opportunities that require effective cash management strategies.
Here are some tips for managing your finances in this more expensive new world, including understanding your current interest rates, optimizing your savings and investments, and leveraging low-interest debt options.
- 1. Understand your current rates
First, it’s important to understand which of your interest rates are affected by the current economic environment. Some rates, like fixed-rate mortgages and certain car loans, will not be immediately affected, while others, like home equity lines of credit (HELOC), may have already changed. Conduct an inventory of your current loans and investments to determine which rates will be impacted and plan accordingly.
- 2. Optimize your savings and investments
With interest rates rising, it’s crucial to ensure you’re earning the highest possible interest rate on your cash by exploring high-yield savings accounts. You should also consider placing interest-bearing assets in tax-free or tax-deferred accounts, like a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), to minimize the tax burden on your interest income.
- 3. Leverage low-interest debt options
Take advantage of low-interest debt alternatives. For instance, if you’re carrying a balance on a high-interest credit card, consider using a lower-interest line of credit to pay off the debt. While unsecured lines of credit interest rates may have increased to around 9 or 10%, they are still significantly lower than the 19-21% charged by most credit cards.
- 4. Re-evaluate your financial decisions
It’s important to re-evaluate your financial decisions to ensure they still make sense in the current environment. For example, consider how higher interest rates may impact your decision to lease or buy a car or how they might affect your plans to save for a home. Adjust your financial strategies as needed to account for the new reality of higher interest rates.
- 5. Use spousal and family tax-free savings accounts
Remember that you and your spouse can both take advantage of TFSA contribution room to maximize your tax-free savings. If you have adult children living at home, you can also encourage them to use their own TFSA contribution room to shelter their interest income from taxation. The new First Home Savings Account (FHSA) may be another place you can save your money tax-free.
Navigating a world of higher interest rates can be challenging, but with careful planning and strategic and sound financial management, you can successfully adapt to the new economic reality. To learn more about how you can better manage your hard-earned savings, please do not hesitate to reach out to us anytime.