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. We do this by making our base mortgage payments and doubling up our mortgage payments – that’s actually one of our financial goals. Lowering our principle today while money is cheap will mean less costs to finance at a higher rate in the future. 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 this debt while it’s cheap. Having no debt burden in our late-40s or early-50s will not only feel amazing but it will provide us with some significant financial flexibility. For one we’ll own our home worth close to $600,000 free and clear.
- Continue to set aside at least 10% of our net income for investment purposes
Every month 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. Money that flows into our Registered Retirement Savings Plans (RRSPs) each month is not spending money or fun money. 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 save up the maximum TFSA contribution of $11,000 or so). In doing so, I’ve been fortunate to maximize both the RRSP AND TFSA accounts. 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: 1) our debt burden and 2) 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 debt payment plans, our savings rate for investing purposes, and last but not least having some fun with any money leftover. 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. After that I think you’ll find you’ll spend far more time on the more enjoyable things that life has to offer. 🙂
What are your plans for higher interest rates? Do you think about them the same way I do?