How we’re going to deal with higher interest rates
I’ve mentioned this on my site before – no doubt interest rates play an important role in the economy. Interest rates affect all of us but not necessarily in a good way.
Here are some general pros and cons of our (prolonged) low interest rate environment.
Pros of low rates:
- Great borrowing costs to finance homes and cars.
- Great borrowing costs for businesses and other investments.
In general, credit is cheap. Low interest rates promote consumption. It makes spending look like the right thing to do.
Cons of low rates:
- They hurt folks with fixed income assets like bonds and saving accounts.
- They do not reward fiscal responsibility, by businesses or individuals.
In general, money is too cheap. Low interest rates discourage savers. It makes saving look like the wrong thing to do.
Recently our Bank of Canada (BoC) hinted that interest rates might actually rise.
(Personally, I’ll believe it when I see it.)
This is because we’ve had speculation the BoC would raise rates for many years now – and haven’t.
What are we going to do???
I’ll tell you:
- Continue to slay the mortgage dragon
Since our total debt comprises of only a fat modest mortgage we’ll continue to focus on killing our mortgage regardless if rates rise or stay the same.
Money is cheap now. It makes sense to kill some debt.
This is counter to what some folks might be doing – taking on more leverage but that’s not smart. Rates will go up eventually. When they do, we’ll have less debt.
We’ll do this by making our base mortgage payments and making additional mortgage payments where we can – that’s actually one of our financial goals this year while debt is cheap.
Lowering our principle today while money is cheap will mean less costs to finance at a higher rate in the future, a few years from now.
Should the rate rhetoric continue for the next 4-5 years, and rates never move, we’ll be close to being mortgage free thanks to paying back our mortgage while debt is super cheap.
Having little to no debt burden in our late-40s will not only feel amazing but it will provide us with some significant financial flexibility. For one we’ll own our home worth over $600,000 free and clear at the time of this post.
- Continue to set aside at least 10% of our net income for investment purposes
After debt obligations are done, we pay ourselves first.
Since I wrote this old post while our income has gone up and our debt obligations have gone down the premise remains the same – we treat savings for investment purposes like a bill payment to Us Inc.
- Payments to Us Inc. are automatic. Every month, money from our chequing account is automatically transferred to our investment accounts. This money is treated just like any other bill payment around our house – a necessary expense.
- Payments to Us Inc. are not to be touched. Like any bill payment, once it’s paid, you rarely get an opportunity to get your money back. Once the payment is gone to the payee, us in this case, that’s it. For example, money that flows into our Registered Retirement Savings Plans (RRSPs) each month is not spent. It’s for our financial future and therefore not to be withdrawn.
In addition to RRSP contributions, we save throughout the year for our TFSA contributions (each January we strive to max out our TFSA contributions at the start of the year). In doing so, I’ve been fortunate to maximize both the TFSA first and then RRSP account. My wife still has some RRSP contribution room left but then again, if we keep up our savings habits, that account should be maxed out in another year or so.
This means in the coming years regardless of what interest rates will or won’t do we’ll have taken care of what we can control:
- Control our debt burden,
- Maintain our modest savings rate for investment purposes.
As you may have concluded by reading this post we don’t worry about interest rates very much.
Sure, rates may go up or they may go down but we have no control over that.
When it comes to money management that means we only focus on what we can control:
- our diligent debt payments, and
- increasing our savings rate for investment purposes.
We have some fun with any money leftover. Case in point, like our recent weekend trip to Prince Edward County to attend a wine and cheese festival. Good times for sure…
I suppose you could worry about higher interest rates but I suggest you don’t.
Focus on getting a good financial plan in place. Focus on sticking to it. After that I think you’ll find you’ll spend far more time enjoying life instead of worrying about interest rates or anything else.
What are your plans for higher interest rates? Do you think about them the same way I do?