Reading the news can bring a sense of dread with rising inflation, interest rates and war headlining 2022. Sometimes it can feel overwhelming trying to read through the headlines to discern how current events can impact your finances. To bring some perspective – and to let you know that no, the world is not ending,  I’ve written this article to discuss how current events are impacting your monthly budget. We’ll also explore some ways that you can adjust and prepare for a higher cost of living.

Rising Inflation

The world is currently experiencing high levels of inflation as we return to normal after the effects of the global COVID-19 pandemic. Inflation is the rising cost of all goods and services that we experience over time. Let’s think about the cost of a litre of gas. According to StatsCan.ca, 25 years ago the cost of gas in the Durham region was around $0.56 per litre. On a recent trip to fill up my car, the price was $1.59 per litre. That increase in price is inflation at work.

The Bank of Canada sets a benchmark for what they consider “healthy” inflation. That benchmark is currently 2.0% per year. As of March 2022, inflation is approximately 5.7% per year. This means that the average cost of goods and services has risen 5.7% since last year. Inflation reduces the value of each dollar you have each day, leaving you with less money to spend and a higher cost of living.

Rising Interest Rates

As inflation increases, interest rates will also continue to increase. Increasing rates impact many types of loans including car loans, mortgages, credit cards and lines of credit. For loans that have fixed interest rates, you will see no changes in your monthly payments. But if you have any debts that come with a variable or adjustable interest rate, your monthly payments may increase. 

If you’re a homeowner with a fixed mortgage that is coming up for renewal, you may also find that you face a higher interest rate at renewal. As your mortgage renews, if the new rate on your mortgage is higher, you will face a higher monthly payment than before.

The increase in interest rates can compound the impact your monthly cash-flow experiences from a rising cost of living. 

War in Ukraine

As a mortgage broker, I never imagined myself writing an article about the war in Europe impacting your finances. But as of February 24th, 2022, we all woke up in a world we didn’t expect. The impacts of this war will be felt globally on two main fronts: food & fuel price.

Ukraine is one of the largest suppliers of grain for Africa and the Middle East. Currently, every able-bodied Ukrainian male aged 18 to 60 must present himself for the defence of his country. As we enter the spring planting season, many crops will not be planted as Ukrainian men and women head off for war. The result will lead to higher grain prices as the same demand bids on a lower global supply, pushing food prices higher.

Both Russia and Ukraine are large producers of natural gas and oil. With sanctions impacting Russia and the prospect of the European Union placing an oil embargo on Russia, global oil and gas prices are expected to climb. With much of our goods being imported from across the globe, higher fuel prices will be passed along to us for a wide range of consumer goods. 

As you can see, the war in Ukraine comes at a critical time for the global economy and we are likely to see this event further impact inflation and your household finances.

 

How to Combat Rising Inflation and Interest Rates

Fortunately, it is not all doom and gloom. According to the Bank of Canada, it is projected that Canada’s GDP will experience a 4.25% growth in 2022. This growth combined with a tight labour market will lead to higher wage growth for Canadians. Since wage growth has remained stagnant for decades, this may be a welcome change.

If your income isn’t expected to increase in the near term, there are several strategies that you can use to combat a higher cost of living.

Trim your monthly expenditures

Now, more than ever is the time to review your monthly budget. So if you don’t already have a budget, I highly recommend that you start one. Take a close look at your monthly expenses and determine which expenses you can eliminate and which ones you can reduce. Some ways you can eliminate or reduce your expenses are:

  • Switch to a lower cost gym such as Planet Fitness or 24-Hour Fitness vs Good Life 
  • Give up smoking (this tip might actually save your life!)
  • Begin grocery shopping at No Frills or FreshCo vs Loblaws
  • Shop the weekly fliers for coupons on items you regularly use
  • Buy regular non-perishable goods in bulk (a higher upfront cost is offset by a lower per-unit cost which equals long-term savings)

Pay off or pay down debt

With interest rates starting to rise, paying off or at least paying down debts on variable interest rate loans can combat an increase in your monthly payments. Lenders calculate Debts such as home equity lines of credit, personal lines of credit and some car loans using a Prime rate. As the Bank of Canada increases interest rates, your lender raises their Prime rate and your payments on these debts will go up. Therefore, paying these debts off or consolidating them using a loan with a fixed monthly payment can help you to reduce the impact of rising interest rates.

Renew your mortgage early

With interest rates expected to continue rising for the next 12 – 18 months, renewing your mortgage early can help you lock in a lower interest rate today. Speak to your mortgage broker to determine if paying the current prepayment penalty would be worthwhile to lock in a lower interest rate today.

You can also use this time to refinance your mortgage and consolidate higher interest forms of credit such as credit cards or lines of credit. If you’re concerned about your monthly payments, ask your mortgage broker about longer amortization periods allowing you to lower your monthly payment.

Summary

In conclusion, as I said at the beginning of this article Dear Reader, the world is not ending. Although the news may be dreary with talk of rising inflation, interest rates and war, I guarantee you that the sun will rise tomorrow as it always does. But if you have any concerns about your monthly finances, speak with a finance professional such as a mortgage broker or financial advisor to help create strategies to protect your monthly finances.

If you’d like to set up a free consultation to discuss your financing options or mortgage renewal, you can book an appointment using the following link: Book a Consultation.

 

About the Author

The column's goal is to level up your financial knowledge and help you avoid common pitfalls and mistakes along the way. Although money management sometimes seems like an intricate task, it doesn't have to be. The advice here is common sense and simple to follow. The first step to a better financial future starts here, and it's never too late to begin. Adam Stapley is a Mortgage Broker with Pineapple Financial and author of the personal finance blog CanadianFinanceGuide.ca. He is intensely passionate about helping Canadians build wealth through the power of real estate. Many of the articles in this column come from Adam's experience assisting Canadians to understand and shape their personal finances. Pineapple Financial Lic #12830 CanadianFinanceGuide.ca adam@canadianfinanceguide.ca