Penelope Graham, Director of Content
With 2022 now officially in the rear-view mirror, many Canadians are looking to firm up their financial plan for the new year. But you can be forgiven if resolution season came and went with nary a budget spreadsheet in sight; today’s financial trends present lingering economic challenges and an ever-rising cost of living, more people than ever are stepping into 2023 with feelings of overwhelm when it comes to money.
Growing expectations of a recession and steep interest rates have raised uncertainty around how to best invest and save money this year. In fact, according to a recent Canadian Survey of Consumer Expectations from the Bank of Canada, there is growing fear among consumers that they would have difficulty paying their bills or face other financial impacts should a recession occur. To help you move forward with confidence, we took a look at the major financial factors impacting Canadians today, and ways to minimize their impact.
- Inflation is expected to remain high into at least 2024, meaning households will face higher prices for longer.
- Growing recession fears have raised pessimism in both business owners and consumers, with both expected to decrease their spending this year.
- Trying a new budgeting tactic can be an effective way to make the most out of limited cash flow.
- Low-interest or balance transfer credit cards can help pay off debt faster.
Prediction 1: Less discretionary spending
It’s no secret that consumers are feeling the pinch of high inflation; the consumer price index hit a 40-year high this past June at a sizzling 8.1%. While the Bank of Canada has made some progress reducing inflation’s growth pace with a series of interest rate hikes, the measure is still far outside of the central bank’s 2% comfort zone – the December reading came in at 6.3%, with food costs up 11%, and prices still rising for clothing, footwear, and personal supplies and equipment, just to name a few.
According to the Bank of Canada study, consumers have indeed reduced their purchasing habits as a direct result of rising inflation, and that high food prices are a “particular source of frustration for households.”
The central bank also points out that while the labour market is holding strong, real wages are far from keeping up with the rate of inflation. Combined with more difficulty in accessing credit, “a growing share of Canadians plan to further cut or postpone purchases in the coming months.”
The Bank finds this is particularly prevalent among those carrying variable-rate mortgages or other debt types, such as a HELOC or line of credit, as their debt servicing costs have soared in the past year.
Prediction 2: A Greater Focus on Budgeting
Given that inflation is expected to remain elevated until at least the second half of 2024, Canadians will have to grapple with reduced spending power for the long term. In this case, a new budgeting approach may be the answer to make the most of limited cash flow:
- The 50/30/20 method: This divides your income into three distinct categories, and earmarks a percentage of your funds for each. Using this method, 50% of your income goes towards needs (such as your mortgage or rent payment, utilities, groceries, insurance, debt repayment, etc. An additional 30% goes toward wants (clothing, entertainment, eating at restaurants, etc.), while the remaining 20% is put toward savings.
- Zero-sum budgeting: This requires that you allocate every dollar in income in pre-planned spending, removing any room for impulse purchases, and forcing you to readjust your budget for any unplanned spending. It’s an approach that requires discipline, but can be a good method for those who need to reassess where they’re spending their money.
- The 60% solution: This requires you to earmark 60% of your total income for regular expenses, with the remaining 40% to go towards savings and other spending such as shopping and entertainment.
Prediction 3: An increased focus on paying down debt
Another survey, this one from CIBC, reveals Canadians are looking to pare down their debt loads in 2023, with 55% saying they need to “get a better handle on their financial situation this year”. According to their findings, one in four people have taken on more debt within the last 12 months.
A steeper cost of living is the main reason for taking on more debt, according to 47% of respondents. Another 34% report that their day-to-day expenses stretch behind their monthly incomes, while 16% say they’ve had to deal with an unexpected financial emergency. Another 16% point to the rising cost of borrowing, and 14% to home repairs.
Nearly a quarter (24%) want to take on more debt this year if they can help it.
According to the Canada Mortgage and Housing Corporation, Canadians are doing a better job of paying off some debt types than others. The Crown corporation finds the lowest delinquency rates are for those carrying Home Equity Lines of Credit and mortgages, which have been trending downward over the last year, despite rising interest rates. However, delinquencies for credit cards and auto loans have increased steadily over the last 12 months, nearing their pre-pandemic levels.
Those looking to pare down their debt loads have a few options; connecting with a financial advisor to create a dedicated pay-off plan is always a wise move. As well, those carrying a balance can look to low-interest credit card options, or cards with an attractive balance transfer feature – which can be a great way to consolidate debt and take advantage of attractive welcome bonus offers – to help pay a balance down faster.
Prediction 4: Less appetite for variable-based debt products
At the height of the pandemic, you could get a variable-rate mortgage for almost nothing; the Bank of Canada held its trend-setting interest rate at a pandemic-low of 0.25% for a full two years between March 2020 and 2022. And borrowers clamoured for that cheap debt – by Q1 of 2022, 56.9% of all new mortgages were variable, a new peak.
That plummeted sharply, however, once the central bank started hiking rates in order to reign in inflation growth; the benchmark cost of borrowing has surged 4% between last March and today, resulting in the best five-year variable mortgage rates increasing to 5.3%, compared to 0.85% during the pandemic. Today’s best HELOC products are also priced in the 6.9% range.
While fixed-rate mortgage pricing is also currently high, the CMHC finds borrowers are turning back to the stability they provide, reflecting a steady uptick in fixed-rate products in the second quarter of 2022.
Prediction 5: A renewed interest in high-interest savings accounts and GICs
Perhaps the silver lining to rising interest rates: the rate of return on passive investment products such as Guaranteed Income Certificates, as well as high-interest savings accounts, are higher than they have been in a long time.
The best five-year non-registered GICs currently feature a rate of 5.15%, which would yield a $1,427 return on a $5,000 investment.
Meanwhile, there are a number of lenders offering attractive sign-up offers for their high-interest savings accounts, up to 4.6% for the first 150 days (lowering to 1.6% after); if you kept a $5,000 balance in your account for a full year, that would earn $142. In today’s high-priced environment, it makes sense to put those savings to work.
On that note, it’s also a great time to assess whether any of your other banking products are carrying unnecessarily high fees. Consider reducing the number of account you have open to two to three, as well as switching to a digital account, which typically come with no fees.
The bottom line
Given today’s economic environment, money is feeling tighter for just about everyone. With a little additional planning, though, 2023 can be less financially challenging. Making measurable and attainable financial goals, based on your unique circumstances, can help you achieve those new year money resolutions, whether it’s amping up savings, paying off debt, or even just making the most of your money from paycheque to paycheque.