Maintaining And Sustaining Your Financial Resilience

How to manage your finances and build wealth in the current climate of rising costs

Rising prices and interest rates are squeezing budgets, but there are ways to cope (and investment opportunities, too). Whether you’re starting out or retired, a homeowner, a business owner or aspiring to a goal, or you simply want to stay on track with your finances, these five tips can help. 

If recent years have taught us anything, it’s that being nimble – in finance and in life – is the key to achieving goals (and gaining valuable peace of mind). 

Consider that it was only around the start of 2022 that the Bank of Canada started hiking interest rates in an effort to combat rising inflation. Since then, the bank’s policy rate has jumped from 0.25% to 5%, its highest level since 2001. 

Few people predicted such a rise. And even though higher rates have slowed inflation, the costs for many things we rely on (like food, which rose 8.5% year over year in July) are still rising.

There are opportunities out there, too: rates on some term deposits have been rising and above inflation, providing real returns for savers after many years of low rates. Also, the job market remains strong, with unemployment near historic lows at 5.5% in July and wages up 5% year over year. 

With all this in mind, here are five strategies you can use to protect and grow your family’s finances and stay fiscally resilient in these uncertain times.

1. Reduce your biggest costs first

It might seem obvious, but when reviewing your budget, try not to be distracted by smaller costs – your reductions will mean more if you manage the biggest items first. 

For example, one common piece of advice you’ll hear is to avoid “subscription creep,” or subscribing to more streaming or other monthly paid services than you use.

It’s important to manage these costs, of course, but most households spend a relatively small amount on streaming, so cutting these expenditures by, say, 10%, won’t affect your overall costs all that much. Instead, “flip” your budget and look at your highest costs first: for most households, these are things like transportation, groceries and entertainment. If you can cut, say, 5% to 10% here, the overall effect will be much greater than eliminating a streaming service or two. 

2. If you have a mortgage, do this “home stress test”

Since early 2022, borrowers with variable-rate mortgages have seen their rates jump with the Bank of Canada’s hikes. If you’re among them, now is a good time to stress test your finances. For example, say your interest rate is now around 7% and rates rise another percentage point, which is possible given still-elevated inflation. If you feel that would strain your finances, talk to your lender about potentially locking into a fixed rate to bring some stability to your payments, until rates hopefully begin to move lower.

If you have a fixed-rate mortgage that renews in the next three or four years, try testing your finances at a 5% rate – a reasonable estimate of where rates could be at that time, if the economy and inflation slow as expected. If you need to make adjustments, aim to pay off high-interest debt between now and your renewal. If at all possible, put off any big purchases you’d have to finance. 

3. Rethink retirement 

You may know someone who retired early during the pandemic – maybe you did so yourself. Many of these were what you might call “hard stop” retirements, where the retiree quit work altogether to enjoy more time with family, friends or perhaps to travel. 

Nowadays, more retirees seem to be considering what you might call a “soft stop” retirement, in which they take a part-time and/or less-stressful job. And thanks to the worker shortage, there’s plenty of demand. This can be a good way to cope with inflation, remain socially connected and stay on track to achieve your retirement goals. 

For example, let’s say you want to travel more when you leave the workforce. That’s a common goal, but the cost of travel has surged in recent years with clear consequences, as evidenced by a recent poll of Canadians – one third of respondents reported having changed or cancelled plans because of higher costs. By working part-time, you could defray those costs and still visit the places you’d like to.

4. Mind the tax implications of term deposits

Term deposits^‡ offered by BlueShore and other credit unions – and guaranteed investment certificates (GICs) offered by banks – have gained attention lately, as it’s now possible to get some of the best rates in years from these investments.

One thing to bear in mind here: the tax implications. To take an example, let’s say a hypothetical investor recently sold a home and invested the proceeds – we’ll use $750,000 for this example – in a term deposit. A bit more than a year and a half ago, that would have returned around 1% yearly, or $7,500. At today’s rates, however, that could jump to around $37,500, which could push our investor into a higher tax bracket, as interest is taxed as ordinary income in Canada.

One way to minimize your tax burden is to hold these types of investments in a tax-free savings account (TFSA). With a TFSA, your investments grow tax-free and can be withdrawn at any time. 

You can also hold them in a registered-retirement savings plan (RRSP), where your growth and interest income is also not taxed, but you will be taxed on withdrawals when you retire and convert your RRSP into a registered retirement income fund (RRIF). At that point, however, you’re likely to be in a lower tax bracket.

A financial advisor or BlueShore associate can help you ensure you’re making the most of your investments while using all the tools available to manage your tax liability.

5. A potential strategy for first-time homebuyers

Any discussion of the high cost of living would be incomplete without mentioning home prices. With the average Vancouver home around $1.2 million, the market is challenging for many first-time buyers to access.

One strategy for those in their 20s or 30s could be to look to purchase a small condo or studio, with the goal of renting it out. Then, if possible, they could continue to live at home while letting that property appreciate and the rental income going towards paying down the mortgage – or go with a two-bedroom suite and rent out to a roommate. Then when our young investor is ready to buy something bigger, they could sell the property, buy a townhouse, build more equity, and then sell again, to purchase a home. 

Emphasizing the “property ladder” like this could be a way to get a toehold in real estate, if it suits your circumstances. Something else to bear in mind is that these days, more parents are open to having children live at home for longer in light of the high cost of housing, and many are looking at ways to leverage their own real estate and savings success to help younger generations with first time home ownership.