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

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2 years ago

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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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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

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7 days ago

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November 6, 2024

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NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

The Canadian Press. All rights reserved.

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S&P/TSX composite up more than 100 points, U.S. stock markets mixed

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4 weeks ago

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October 16, 2024

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TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

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

The Canadian Press. All rights reserved.

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S&P/TSX up more than 200 points, U.S. markets also higher

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1 month ago

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October 11, 2024

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TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

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

The Canadian Press. All rights reserved.

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