Got any cash in a tax-free savings account? Then you have a lifeline if your mortgage payments rise to unmanageable levels.
A top objective for households struggling to keep up with inflation and rising mortgage costs is to avoid racking up additional debt to cover expenses. One way to do this is to tap into savings that might today earn 1 to 3 per cent at most.
TFSAs can hold pretty much any type of investment or savings vehicle. Many people profitably use these accounts to invest in stocks, but others have high rate savings account TFSAs. We now see the benefit of having savings on hand for challenging times like these. Inflation is running at 7.6 per cent, and the cost of the variable-rate mortgages so many home buyer chose in recent years has risen steadily.
The Bank of Canada is expected to increase its trend-setting overnight rate on Wednesday for the fifth time this year, and further rate hikes are possible. But high rates cannot hold indefinitely. In 12 to 18 months, we could very likely see rates and inflation both heading back to more normal levels.
Households struggling with high mortgage costs and inflation need an action plan to make it through without incurring new debit via lines of credit, loans and, worst of all, credit cards. TFSAs holding cash are an ideal asset to use. Selling stocks or funds in a TFSA may also make sense.
Tap the TFSA in the near term and re-contribute the money in future years, when you’re back on solid ground again. Try not to drain your TFSA, though. Leave something for the potential financial emergencies that could emerge if all doesn’t go according to plan in the economy.
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Rob’s personal finance reading list
An inflation side effect for seniors: Loneliness
Rising costs are increasing social isolation and loneliness for seniors who have to cut back on recreational costs as a result of inflation. A 74-year-old woman quoted here has decided to go back to work.
Her restaurant spending? $1,000 per week
A story about a U.S. tech professional who spends US$1,000 on restaurant meals each week – and about $36 on groceries – has gone viral. Of course it has. What do we like to do more than judge other people’s spending?
The retirement risk zone
Financial planner and blogger Robb Engen uses the term retirement risk zone to describe the period where you draw on your personal retirement savings in order to delay the start of Canada Pension Plan retirement benefits to age 70. Taking CPP at 70 instead of the standard age of 65 or earlier offers substantially higher monthly payouts. But, as Mr. Engen points out, people feel anxiety about using their savings to get by until higher CPP payouts kick in. He offers some thoughts to ease this anxiety.
After the storm
Tips on what to do if your home is damaged in a storm, including a list of disasters that would typically be covered – and not covered.
Ask Rob
Q: When you talk about GICs, are you saying to look at moving funds from your mutual funds, your RRSPs or your stocks into GICs?
A: No. Look at GICs to augment or replace bonds in your investments, or as a place for secure savings. All investors should figure out and stick to a suitable mix of stocks and fixed income, which can include bonds and/or GICs.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Of interest to renters, including students going back to school: a review of tenant insurance offerings from a variety of providers.
The Money-Free Zone
The Imperial by The Delines is a sad song about reconciling with the past and I like it more every time I listen to it. Also try The Oil Rigs at Night.
From the Twitterverse
A financial adviser explains why he does not like the new Tax-Free First Home Savings Account created by the federal government to help young adults afford a home down payment.
In case you missed these Globe and Mail personal finance-related stories
- Car in the shop? You could spend thousands in rental costs
- Fixed or variable? How to pick the right mortgage as gap between rates dwindles
- 10 tips for managing withdrawals and investments in a First Home Savings Account
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where's the happiness? • Who should and shouldn't worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don't make this potentially costly assumption about the CPP Survivor's pension
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
