Real advice for dealing with historic inflation and interest rate hikes

With Canada’s inflation rate reaching a staggering peak at an overall rate of 8.1% in July, gasoline prices up 48% year over year and with grocery bills rising 9.7% per year, many Canadians are feeling the strain on their household budgets. That is why capital of the coast — Canada’s largest credit union by membership and BC’s first federal credit union — is here to answer the questions that keep you up at night and give you the real advice you need to ensure that you are able to continue planning for the future while “recession-proofing” your finances.

The Bank of Canada has already raised the interest rate four times this year, with the possibility of more increases to come. How will these rate hikes affect inflation and will they really improve affordability?

Some inflation is still expected. But while the Bank of Canada aims to keep it around 2% year-on-year, inflation is currently four times above that benchmark. When inflation gets too high, the Bank of Canada targets the problem at its source by changing the interest rate charged to commercial banks (known as the target overnight rate). He can cut interest rates to stimulate spending, and as the economy rebounds, he can raise interest rates again to prevent excessive inflation. Everything is cyclical and the timing depends on the level of inflation.

Higher interest rates encourage saving and discourage borrowing and therefore spending. In response, companies raise their prices more slowly than expected or even lower them to encourage demand, which usually reduces inflation and improves affordability. The Bank of Canada’s goal is to create a situation where it is able to find a neutral rate that suppresses excess demand and avoids stimulating it without restricting demand or causing a recession. As we move forward, it will be crucial for the Bank to find this balance.

I bought a house when the housing market was at an all time high. As interest rates continue to rise, I worry about being able to keep paying my mortgage. What should I do now to prepare for the increase and protect my investment?

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As a mortgage holder, it’s important to keep a close eye on the path of rate increases and their impact on monthly cost growth. However, not all mortgage holders will be affected in the same way. Until your mortgage is renewed, holders of fixed rate mortgages will not be affected by interest rate increases, while holders of variable rate mortgages will see their rates increase with each increase.

If you have a variable mortgage and are able to, you might want to consider increasing your payments now. As interest rates go up, less is paid for principal and more for interest, which will keep you going. Another option is to switch to a fixed-rate alternative, which means all your payments will stay the same for the duration of your term. Although variable rate mortgages tend to be less expensive than fixed rate mortgages, fixed rates will allow you to avoid the uncertainty that comes with interest rate increases.

Everyone’s situation is different and will impact how each person weighs their options. A great way to determine the best choice for you is to tap into a reliable resource like Coast Capital. mortgage specialist who can provide you with personalized expert advice to help you determine your next step.

Although inflation and the cost of basic necessities like food and gasoline continue to soar, wages and salaries are not keeping pace. If I’m on a fixed income, how can I plan for the future when the money I’m making doesn’t match what’s going out.

If inflation and rising interest rates are weighing on your finances more than ever, you’re not alone. To set yourself up for success under uncertainty, it’s a good idea to regularly review your monthly expenses. If you find that you need to dip into your savings to cover your regular expenses, take the opportunity to review your budget and expenses and look for ways to reduce your expenses. For example, it may be possible to limit your subscriptions, whether it’s an unused gym membership, apps you’ve forgotten about, or streaming platforms you don’t use often. You might be surprised how much money you spend on subscriptions that aren’t used enough.

Addressing a Financial Advisor is a great way to assess your financial health. There are also free online tools like Coast Capital’s Money talkthat can help you understand where you are, where you want to go and how to get there.

With so much uncertainty and talk of a potential recession, what can I do to “recession proof my finances”?

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Unfortunately, going through a recession in your financial life is inevitable and no expert can predict when it might happen. In the meantime, there are a few essential things you can do to prepare.

Start building an emergency or contingency fund that is separate from your day-to-day budget to help you deal with unexpected expenses and the uncertainty ahead. Surviving a recession also requires disciplined budgeting, so now is a great time to pay off or pay off high-interest debt. Additionally, you might consider seeking additional income streams by investing or “side hustle”. This allows you to supplement and diversify your current income, meaning your income won’t be completely cut off if you run into trouble with work, and build your savings pool faster. Above all, don’t panic! Taking the time to make a plan and consult with advisors now will help you weather the storm.

This article is provided for general information only. It should not be considered as advice or a financial, tax or investment guarantee on the future, nor be considered as a recommendation to buy or sell. The information in this article, including information relating to interest rates, market conditions, tax rules, fees and other investment factors is subject to change without notice, and Coast Capital Savings Federal Credit Union is not responsible for updating this information. All third-party sources are believed to be accurate and reliable as of the date of publication, and Coast Capital Savings Federal Credit Union does not warrant the accuracy or reliability of any such sources. Readers should consult their own professional adviser for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are properly considered and action is taken based on the latest information available.

Stephen V. Lee