2020 was a sobering year filled with unprecedented economic challenges. Thanks to the swift collective response to the pandemic, the outlook for 2021 is bright with possibilities of recovery in all areas of your life, including your relationship with money. In this post, we’ll take a look at what the next year has in store for each of the three main themes of personal finance: borrowing, saving, and investing, so you can be prepared for what lies ahead.
Borrowing money from the bank
The Bank of Canada (BoC) is committed to maintaining its policy interest rate at a record-low of 0.25% for the foreseeable future. As Canada’s economic recovery proceeds as expected, the BoC says it will hold the interest rate at 0.25% “until economic slack is absorbed” and a 2% inflation rate is “sustainably achieved.”
Lower policy interest rate, lower borrowing costs?
The BoC’s decision impacts the rates you get on things like your mortgage, credit card, and bank loans. A lower policy interest rate means banks can set lower interest rates for their clients. For you this means it is now less expensive to borrow money than it was before the pandemic.
To understand why this is the case, it’s important to understand how banks operate.
While you’re sleeping, banks will lend or borrow money among themselves. Banks will lend money if they have a cash surplus at the end of the business day. Meanwhile, they will borrow money from another bank if they have insufficient funds to cover the day’s transactions.
The policy interest rate is the target interest rate set for these overnight inter-bank transactions. This rate is set by the BoC, which manages Canada’s economy and finances as the nation’s central bank.
When the BoC sets a low policy interest rate, like 0.25%, this means that the cost of lending or borrowing money between banks is comparatively less expensive to say, a pre-pandemic rate, such as 1.75%.
In turn, since it costs less for banks to borrow and lend between themselves, they can lower their products’ interest rates. As mentioned above, for you, this means the cost of borrowing money from a bank is cheaper.
What’s the catch? The BoC typically lowers its benchmark rate to encourage you, the consumer, to borrow money. Since you normally only borrow money when you plan to spend it, and spending is what fuels economic recovery, you can now see why the BoC lowers its interest rate.
Making the decision to borrow
Just because it’s cheaper to borrow money, doesn’t mean you have to do so. A decision to borrow money from a bank, whether it’s for a small line of credit or something as big as financing a mortgage, should not be made in haste or taken lightly.
While it’s unlikely the interest rate on your mortgage or loans will change, if you delay your payments, you will most probably end up having to pay late penalties. Interest will also accrue, necessitating hefty payments down the line. Not to mention, your decisions may impact your credit score and you may even jeopardize your ability to borrow money in the future.
This is all to say: If you’re considering borrowing money from your bank in the near future, yes, it’s better to do so when rates are extremely low, but you need to also consider your individual situation. There’s no such thing as free money: Are you able to repay back the amount you borrowed? It’s equally important to assess how borrowing fits into your overall personal finance strategy.
Saving for your goals
COVID-19 cases are climbing across Canada, which has led to partial lockdown measures. These partial lockdown measures, from physical distancing to closing ‘non-essential’ businesses and 8pm curfews, could pose significant obstacles to returning to a pre-pandemic way of life in the near-term. But there may be a silver lining for you in all of this if you’re looking to stack up your money and save.
Spend less, save more
Measures implemented by provinces to ensure public health and safety and stop the spread of COVID-19 may actually work in your favor as they can discourage and even protect you from spending needlessly.
It’s no secret that when you don’t spend as much, you’re able to save more.
According to a recent survey by Scotiabank, Canadians are becoming better savers thanks to reduced spending in other areas of their lives. In fact, Canadians have increased their savings by $160 billion during the pandemic.
“The pandemic has prompted many Canadians to reassess their personal finances and short-term priorities, shifting how they manage their money and planning for whatever uncertainties lay ahead,” says D’Arcy McDonald, SVP, Deposits, Investments, & Payments at Scotiabank. “Not only are Canadians making savings a priority, but with different spending patterns created by the pandemic, many are seeing their savings grow even faster.
Managing your savings
So, what happens after you’ve managed to put some money aside? You can do a couple of things, namely place it in your savings account, which is an important aspect of any personal finance strategy. However, if you’re just saving in a savings account, you’re not going to get the best rate of return right now. Again, this goes back to the BoC interest rates being so low.
Central bank policy rates are a double-edged sword. While your bank will offer you ultralow interest rates on loans and lines of credit, they will also lower the interest rates for your savings account. Typically, the decrease is negligible, but it may be worth looking into other savings options to make the optimize your personal finance goals.
“In your interest, you may want to look into a TFSA. Something that gives you more bang for your buck,” says Rothenberg Wealth Management Advisor Stuart Greenley.
Investing to grow your income
The BoC expects Canada’s economy to grow by an average of almost 4% in 2021 and 2022, following “one of the deepest recessions in Canadian history.” The Conference Board of Canada estimates that the GDP contracted by a whole 5.3% in 2020.
With growth expected this year, economic recovery is on the horizon. The economy is set to retrace its 2020 setback starting as soon as the second half of 2021 depending on the evolution of the pandemic and in particular, how quickly vaccines can be distributed across the country.
As the inoculated population grows, the economy can reopen and a sense of normalcy to everyday life and, perhaps most importantly, ‘business as usual’ will gradually be restored. This will filter into different facets of the investment landscape, which will certainly affect your personal finance strategy and goals.
Implications for stock market and equities
When it comes to the stock market and equities, it is important to keep in mind that, the stock market often reflects the anticipated direction of the economy.
In 2020, as business activity was restricted, people were laid off, and sectors flickered out, whole industries suffered a decline in output. As the economy starts recovering in 2021, industries affected by the pandemic can start to reopen, albeit slowly. With companies able to resume their activities, their stocks are poised for recovery. But how quickly affected stocks will make a comeback remains to be seen.
Fixed-income investments
Though stocks usually get the headlines – an important asset class is fixed income. The fixed income component of a portfolio can include Guaranteed Investment Certificates, Government & Corporate bonds, and preferred shares. These options can form an important part of your personal finance strategy, providing a predictable and steady stream of income in the form of regular interest or dividend payments.
Our balanced portfolio strategy
Regardless of the outlook for equities and fixed income investments in 2021, it’s important to maintain a well-balanced investment portfolio tailored to your specific situation. A diversification into different asset classes will help reduce the volatility in your portfolio.
“The key to investing is to make sure that your portfolio is well-balanced” says Rothenberg Vice-President and Wealth Management Advisor Maurice Pallone. “You want to be able to take advantage of opportunities when they arise, and simultaneously protect your portfolio from unanticipated events.”
Conclusions
- Borrowing money is cheaper, but getting into debt is also easier
- The returns on your savings may be lower than before the pandemic
- A well-balanced investment portfolio is the key to success
During these times, it’s especially important to seek out the advice of a wealth management professional, who can coach you on money management and guide you towards creating a balanced portfolio that is suited to your financial situation and short- and long-term goals. Simply email us at inforequest@rothenberg.ca or call us at 514-934-0586 for an introduction to one of our trusted advisors.