Prioritize debt repayment and learn about interest rates: Planworth CEO’s advice for an uncertain economy

The Bank of Canada may have hit pause on rate rises for now, but there are still perils ahead for the financially unwary.

From inflation to interest rate hikes, a convergence of financial challenges has made it much harder for Canadians to make ends meet. To cope with spiralling costs, more and more people are skipping meals or deferring savings for retirement.

It’s a climate of “uncertainty,” says Tarsem Basraon, co-founder and CEO of Planworth, a financial planning platform geared to investment advisors that attempts to offer a 360-degree view of an individual’s financial health. Equipped with toggle functions that capture economic shifts like interest rate hikes in real-time, it also allows individuals to see how these market forces affect present and future plans.

Basraon can’t put money in people’s accounts, but the former tax and estate lawyer and high net worth advisor would like to see the average Canadian access the financial advice, tax and estate planning that’s usually reserved for the wealthy.

“The wealthier you are the more likely it is that you have your own tax lawyer and tax accountant, but the average person actually benefits more from that sort of guidance, because saving somebody who is making $50,000 a year a few hundred dollars actually has more of a material impact on their life than saving $100,000 for someone worth $50 million.”

Here, Basraon weighs in on the economic climate, why it should change our behaviours and priorities, and who the average Canadian might call for advice.

How do you describe the current economic climate?

Canadians don’t really have a good grasp of it. Are we in a recession like 2008? Are we just in a period where everything is flat? Decisions like Should I buy a house? Should I sell a house? are difficult to make right now. If there’s no obvious answer, it’s because there’s complete uncertainty about what the next six to 12 months are going to look like.

What keeps you up at night?

Inflation and interest rates because they affect everything else. They affect my budget and my returns in my investment account. And because they create so much uncertainty, they affect my ability to keep my plan on track because they create so much uncertainty.

Inflation is a very real thing. A lot of Canadians haven’t experienced this kind of inflation or these types of interest rates. The head-in-the-sand approach is kind of dangerous because if you’re spending more money on your groceries and your bills so that you cut back on your savings — that’s not the right approach. I mean, yes, obviously you need to eat and obviously you need to live, but you need to ask what is the impact of reducing savings to do that? Does this mean I need to retire later? Or does it mean I can’t pay for my kids’ education because I need to cut back on my RESP contributions? Those are the discussions people need to be having, instead of assuming it’s going to be fine. We have no idea how long this is going to last.

I’ve given up on saving due to the insane increase in my grocery bills alone.

You’re not alone. But it’s also one of those things where you must take a hard look at it and have someone else look at it and say, Here’s what all of this means. As humans, we always look at things in terms of what’s most urgent. If your ability to pay your rent and groceries and utilities is the most pressing thing then that’s what you’re going to focus on, right? Savings and retirement and financial wellness and all that sorts of stuff are going to wind up a secondary consideration.

What can people do to protect against what appear to be future fluctuations?

A big issue is the lack of financial literacy. Part of that is just how the system works: You don’t really learn these things unless you have to do these things. Obviously, what would help is if Canadians were more educated about it in school. Or when you get a mortgage that the bank would explain to you what happens to your mortgage if interest rates go up in the future and what you need to think about.

When there are uncertainties, there’s nothing wrong with calling a professional. Someone helped you get that mortgage or that loan and you should be calling them and asking questions. They should be able to walk you through what the impact is. You may have options that you’re not aware of. You may have the option to convert to a fixed-rate mortgage and that may or may not make sense. Or, if your term is coming up, you may have the option to end your term early and convert to a new term.

What should people be educating themselves about now?

People really need to understand that a rise in interest rates is a big deal. I don’t think people fully understand the impact on your cumulative interest that you pay and your repayment period — and what that means to your overall financial wellness over a lifetime. A change from 2 to 4 percent interest seems small but really you are talking about a 100 percent increase.

Being ignorant of what these things mean is a definite failing of mine — but it does seem tied to my feeling that financial planning services are for the wealthy.

It’s the opposite. People that are wealthy don’t generally need to be financially literate because they have great advisors.

Many Canadians think of their homes as part their retirement plan, and use their home line of credit etc. Will higher interest rates change all that?

We’re going to see a shift in people’s priorities where debt repayment moves up the list. Originally, debt repayment was a low priority because of low interest rates. So if you’re choosing between different avenues to allocate your income, for example allocating it to savings accounts or to helping your children out with a wedding or down payment or their education costs, those types of things are a much harder decision now because of how high the interest rate is on this debt.

You have to prioritize debt repayment these days over other priorities because you don’t want to end up in a position where you can no longer make those payments.

People are often given wacky tips on how to save money. I’m thinking of things like freezing your credit card in ice. What is your preferred method?

It’s forced savings. Anything you can take off your pay cheque or out of your bank account and put into your savings is the most disciplined way to do it because it’s out of your control.

Another tip: credit is great but if you don’t need the money, don’t get the credit-limit increase because options are the worst thing you could have when you need to hunker down and allocate your resources to the best use like debt repayment.

I’m getting notices from my bank that I’m eligible for a credit limit increase…

It’s so easy to do because it’s just a click of a button.

 
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