What is inflation?
Inflation represents the rate at which the cost of goods and services increases over a period of time. Essentially, the percentage change in the price of the goods and services is used as an estimate of the amount of inflation in the economy overall.
The Bank of Canada (BoC) actively increases and decreases interest rates to control inflation. Historically, the BoC has tried to keep target inflation at 2% a year.
How is inflation measured?
The Consumer Price Index (CPI) is one of the most widely known economic indicators in Canada. The CPI compares, over time, the cost of a fixed basket of goods and services purchased by consumers – such as food, housing and clothing. Essentially, the percentage change in the price of the basket is used as an estimate of the amount of inflation in the economy overall.
Tip #1: Re-assess your budget
While no one likes rising prices, the latest wave of inflation might provide the perfect opportunity for you to take control of your finances by revisiting your budget or starting one.
Ever wonder where all your money goes each month? Here are two simple steps to track your expenses:
Step 1
Calculate the total income you’ll receive from all sources – for example, employment income, rental or investment income, support payments, pension etc.
Step 2
List all your expenses and divide them into two categories:
- Non-discretionary, or mandatory costs such as mortgage payments, rent, hydro, etc.
- Discretionary, or non-essential costs – such as dining out or takeout, runs to the coffee shop, etc. If money’s still left after you’ve accounted for all your non-discretionary costs, prioritize your discretionary costs based on what is most important to you.
Your budget can be as basic or detailed as you like – whatever works best for you. The important thing is to set up a budget and reassess it at least twice a year to ensure it’s working to meet both your short- and long-term financial goals, or whenever you have a significant change in your income or expenses.
Tip #2: Save money by restructuring your debt
Inflation can significantly affect your lifestyle – especially if you’ve taken on too much debt, whether that’s credit cards, car payments or even student loans.
Having a clear plan for how you will manage your repayment and knowing what options are available to you are two great ways to lower your monthly payments, get out of debt more quickly, and establish a sense of control over your finances.
Here are some strategies to help you become debt-free faster:
Restructure your debt
Chances are you may be paying more interest than you need to, based on the types of debt you have.
Restructuring your debt can lower your interest payments, freeing up much-needed cash to help you get debt-free faster. There are a few different ways to do this.
- Switching to a lower interest-rate credit card: Many credit cards have high interest rates. If you have credit card debt, you might want to see if there are options available with a lower interest rate, as this could save you money.
- Consolidating your debt: If you have multiple loans or credit cards, you may be able to combine them all under a new credit application to take advantage of a potentially lower annual interest rate and payment. This might be under a secured or unsecured line of credit or even a new loan. This way you’ll have one easy payment, which should alleviate a lot of stress.
Tip #3: Explore your mortgage options 
As you may well know, periods of inflation are usually followed by rising interest rates, which can impact your cashflow, especially if you have a mortgage. It’s important to understand how your mortgage payments will be affected as rates rise:
- If you have an existing fixed rate mortgage, you will not be impacted by rate changes until your renewal date.
- If you have a mortgage with a variable rate, you can likely expect your interest rate to increase, unless you have a variable rate mortgage with Cap Rate Protection. You may want to consider switching to a fixed rate, which will guarantee your rate for the term of the mortgage. Most variable rate mortgages will allow you to convert to a fixed rate mortgage. You would have to speak with your lender to see what the steps are and if there are any prepayment charges or fees that you’d have to pay.
What is a variable rate with Cap Rate Protection?
A variable rate mortgage with Cap Rate Protection has fixed payments for the term of the mortgage that are calculated based on a cap rate rather than the current variable rate; as rates rise more of your payments would go towards interest, and less to the principal (but your monthly payment remains the same).
- If you’re looking to purchase a home, you may want to start the mortgage pre-approval process before the expected interest rate hikes. A pre-approval is when a mortgage lender looks at your finances to determine the maximum amount they will lend you and at what interest rate. Typically, the pre-approval is valid from 60 to 120 days, which means the interest rate is guaranteed for this period.
What are the key differences between variable and fixed rate mortgages?
Generally speaking, fixed rate mortgages are ideal for people who want the security of knowing that their payments will remain the same over the term of the mortgage. When interest rates are expected to rise, fixed rates will be attractive to avoid financial impact.
Variable rate mortgages hold appeal as the initial interest rate is generally lower than a fixed rate, and there is the potential to pay less interest over the term of your mortgage if the Bank of Canada has little to modest rate hikes; however, there is no easy way to predict this with 100% accuracy, which is why variable rates have interest rate risk.
Tip #4: Keep an eye on your long-term investment strategy
While periods of inflation can be concerning for investors, it’s no time to panic. Investing in a balanced portfolio, containing a mix of stocks and bonds, has a greater potential to outpace inflation and help build wealth over time. This is due in large part to the strong returns earned by stocks, which have historically beaten inflation by a large margin.
Your portfolio’s asset mix of stocks and bonds is a key determinant of meeting your long-term investment goals. Think of bonds for income potential and as a shock absorber for your portfolio during stock market downturns. By contrast, stocks are the growth engine of your portfolio, with a higher allocation offering greater long-term return potential, but with a corresponding increase in risk.
On the other hand, if your investment portfolio holds a significant portion of assets in cash for a considerable amount of time, the minimal returns provided by cash may drag down your overall investment portfolio performance. Your cash holdings may not even keep pace with inflation, leaving you with a negative real return.
Tip #5: Reach out for financial advice
During times like these it’s important to have access to sound financial advice. If you are experiencing financial difficulty or simply want to ensure you’re on the right track with your finances, reach out to a financial advisor today. An advisor will review your financial situation, present you with options and recommend a strategy to help you best address your concerns.