Maintaining And Sustaining Your Financial Resilience

How to manage your finances and build wealth in times of rising costs

Rising prices and interest rates can squeeze budgets, but there are ways to cope (and sustain 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 tips can help. 

If challenging times 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). With that in mind, there are always opportunities to navigate your way through the turbulence. Here are five strategies you can use to protect and grow your family’s finances and stay fiscally resilient in 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” when you're 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”

In uncertain times, borrowers with variable-rate mortgages may see their rates jump with Bank of Canada hikes. If you’re among them, it might be 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 in times of rising 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 begin to move lower.

If you have a fixed-rate mortgage that renews within three or four years, try testing your finances at a different rate – calculating for a reasonable estimate of where rates could be at that time, if the economy and inflation slow. 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 took an early retirement – 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. 

But would-be retirees may want to consider what you might call a “soft stop” retirement, in which they take a part-time and/or less-stressful job. 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 may have 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

Sometimes in challenging times, term deposits^† offered by BlueShore and other credit unions – and guaranteed investment certificates (GICs) offered by banks – offer safe and solid rates of return on your investment.

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. In stable times, that might have returned around 1% yearly, or $7,500. At inflated 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 well over $1 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.