Investment

Questions to ask yourself when allocating money to debt repayments, savings and investments

Published

2 years ago

January 15, 2023

With interest rates rising, it’s a good time to renew interest in how you allocate capital between debt repayments, savings and investments. Photo by Getty Images

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Have you made up your 2023 intentions? If not, one of the key topics to consider is how much debt your household should carry.

Like corporations, there is a sweet spot for how much debt is optimal. And especially as mortgages come up for renewal, it’s a good time to renew interest in how you allocate capital between debt repayments, savings and investments.

Mortgage decisions

The biggest liabilities for most families are mortgages. As interest rates go up, this will impact how much of a mortgage a household can comfortably carry.

I suggest an important consideration is the stability of family cash flow. Is there a risk of reduced household income in the foreseeable future?

The second factor is the collective tolerance for uncertainty. Financial markets expect central banks to pivot by lowering interest rates once inflation is under control. However, should inflation prove to be more resilient, how would the household finances be impacted by a sustained mortgage rate of five or six per cent?

Insurance for disability or critical illness is another important consideration in times of uncertainty. Should an unexpected event happen to a breadwinner’s job or income potential, can the family comfortably service its current debt obligations?

Emergency funds

It’s always great to have a rainy day fund. An accepted standard in financial planning is three months of one’s salary, but the amount really depends on the liquidity needs of the household.

For some households, there may be enough liquidity in short-term investments and savings to cover debt obligations and sustain ongoing expenses.

But to account for events such as unemployment, especially if you think it will take longer to find an opportunity with comparable pay, it might make sense to save more.

Investments

Investments are one of the best ways to keep up with inflation and make sure your purchasing power is not eroded over time.

There are different types of investment options depending on your objectives. We know fixed income is fixed, meaning you have locked in your investments at a certain rate. Unless the issuer is bankrupt, you will get your invested capital back plus interest income. This can be a good option for some, especially when interest rates are high.

But if inflation rises or persists, fixed income alone will make it difficult to keep up with a higher cost of living. During the hyperinflation period of the 1970s and 1980s, equities were the asset class that kept up with inflation, but it was a volatile ride since the stock markets reflected the worries in the economy.

People have different orientations when it comes to risk tolerances and time horizons, so it’s best to seek out advice from someone who understands your goals, objectives and intentions, and plan accordingly.

As you can see, how much debt to carry for is not a standalone question. There is always a need to balance risk management, liquidity and investment objectives.

Rita Li is an investment adviser with RBC Dominion Securities, RBC Wealth Management.

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

4 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

2 weeks ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

3 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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