The End of Low Interest Rates

The period of low interest rates is coming to an end. According to current forecasts, the rates will start rising midway through 2010. For many Canadians who went on holiday shopping sprees, stretching their credit limits to the max, the rise could spell sudden difficulty or disaster.

The Bank of Canada has warned that the biggest risk to the country's financial system is record household debt. Canadian households spent an average $71,360 last year, two per cent more than 2007. Approximately 20 per cent represented housing expenses.

As many Canadians wish to unload their mortgages as soon as possible, they are struggling to meet payments due to accelerated pay-downs on principal. Combining these high payments with other debts has put a stranglehold on many consumers.

It is crucial to take control of your debts before they control you. Experts suggest developing a plan of action to tackle your debts before problems arise.

It may be wise to suspend accelerated pay-downs on your mortgage. Use the extra cash from the lower mortgage payments to tackle the credit cards and other debts. Refrain from adding debts to your cards while you reduce the balances. Remember that higher unpaid balances carry higher rates of interest. It may also be advisable to take a consolidation loan at a lower rate of interest and pay off the cards. Also, try not to use more than one or two credit cards.

Sometimes, debts can get the best of us. Don't be afraid to seek help from credit counselors, if you feel that you are beginning to drown in debt. These professionals can help you before you panic and assist you in gaining control of your financial situation.
 
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Good Debt Versus Bad Debt

How many of us have been to our physician and received an explanation about good cholesterol and bad cholesterol? Much has been written about it, as well. But, how many have heard explanations about good debt versus bad debt? Probably very few, as financial education is sorely lacking in society.

Personal debt is on the rise, partly because obtaining credit today is relatively easy. If you breathe, you can probably obtain a credit card from your bank or a retail store. And, more often than not, the only one who benefits is the one who issues the card and charges interest rates that can exceed 20 percent.

Far too many consumers confuse credit cards and cash. If you are prepared to pay off your monthly balance and merely use the card for convenience, you're in the responsible minority. However, far too many people freely use their credit cards and neglect the fact that the bill eventually has to be paid. Paying only a minimum at the end of the month only digs a deeper hole. And, truthfully, most people don't keep track of how much they spend on their cards.

On the other hand, not all debt is bad. Taking a mortgage to purchase a home is a wise investment. As the house appreciates, the value will exceed what you paid on the loan. Another example of good debt is securing a loan to purchase high return stocks or bonds. When the return exceeds the interest paid, your debt has accrued value.

Experts suggest that your debt-to-income ratio should not exceed 20 per cent. Higher than that looks bad on credit reports and can lead to difficulties. Better to keep debt to a manageable level and avoid the temptations of living on credit. Even when times are good, don't forget to prepare for the eventual rainy day as well.

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Survey: National Salary Increases Less Than 3%

Ever the employee's question, the issue has achieved far more relevance in the current economic climate. No longer is the annual salary increase a matter of form. In fact, many employees were relieved at year's end to learn that they would still be employed for the coming year, let alone expect a raise from the boss.

The truth is that, owing to a negligible inflation rate, even the slightest salary increase will, in reality, contribute to a gain in living standards. Nonetheless, this is not to say that salaries in Canada will not rise this year. The question on many lips is how much?

According to surveys conducted recently across Canada, encompassing a broad spectrum of more than 700,000 employers, Canadians should not expect large increases this year. Estimates average between 2.3 to 2.8 per cent nationally. Although the national average was 2.2 per cent in 2009, caution in the business community is keeping the numbers down, at least for the foreseeable future.

Employees in Saskatchewan are projected to earn 4.1 per cent more this year, due to the province's energy boom. Ontario and British Columbia bring down the national average, as estimates are increases of 2.6 and 2.7 per cent respectively, due to low performance in manufacturing and forestry.

In actuality, many companies across the country have projected zero salary growth for 2010. While this is not set in stone, many employers are waiting to see how the economy reacts over the next few months before making new financial commitments.

Another factor to be considered is the number of employees pulling double workloads to compensate for reduced workforces. Easing these conditions could also be considered to be a benefit.

In this recession, every little bit will help.

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Corporate Financial Planning: Mutual Funds and Fees

How much do you really know about your financial planner? Here is an individual that you have entrusted with the care and well-being of your financial portfolio. Are you truly getting the best value for your hard-earned money?

Let's begin by examining the role of the financial planner. Do you actually need an expert to advise you where to best invest your money? The truth is that financial experts can predict the future as well as you. If you're like most Canadians, you invest primarily in mutual funds. However, nobody can accurately predict how a mutual fund will react. Perhaps a crystal ball will tell you about the future activity of a particular stock. True, the financial planners spend a good deal of time and energy studying trends, monitoring market activity, and keeping an eye on the financial world. But, predicting the future is not a human trait.

When you pay an advisor to direct you to the best mutual fund, you're actually paying twice. The average Canadian annually pays the mutual fund roughly $2,000 for every $100,000 invested. You don't notice the fee because it's deducted by the fund before their report to you of the fund's results. In real terms, this "fee" amounts to anywhere between a quarter to a half of the after inflation gains on your invested funds.

Returning to your planner, most planners are paid on a commission basis – the more they sell you, the more they earn. Thus, you're paying percentages to both the mutual fund and the person who directed you there. Aren't the majority of the gains supposed to stay in your pocket? One suggestion is to hire a planner on an hourly basis. This removes any conflict of interest. The planner will help you get the most for your money, especially if you have complicated tax issues to address.

It's your money! Be in control by hiring professionals who work for your best interest.

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Risk Management: The Financial Safety Margin

Investing is a part of our culture. Many of us invest a portion of our income for our needs, present and future. However, investing carries with it an element of risk. Therefore, it makes good sense to build a safety margin into your personal investment plans.

Playing the stock market is virtually a national pastime. However, as recent history has proven, the value of stocks can plummet, sometimes quite rapidly. Therefore, some investors will attempt to pay the lowest possible price for stocks. If the floor should fall out from under that stock, you stand a good chance of recouping most of your money.

Even if your cash flow is healthy at present, always be prepared for the inevitable. Many jobs today are not 100% secure. Take a couple of months of living expenses and tuck the money away in a savings account or money market.

The dream of many newlyweds is the purchase of their first home. Many, though, make the mistake of sinking all their available cash into that purchase and further committing both their salaries to make the monthly mortgage payment. If you can't afford the mortgage on one salary, think twice! If one job should disappear, you could face serious problems.

At the other end of the spectrum are those heading into their retirement years. Is your investment portfolio secure? Will you be able to rely on it? If you assume that the portfolio will generate a double-digit annual return, you may be surprised. Markets have proven to be rather volatile. It would be wiser to assume a much lower rate of return. Also, when you calculate withdrawals from your initial portfolio, experts advise withdrawing no more than an inflation-adjusted 4% each year. This amount will allow you to remain in a fairly stable condition, however the market moves.

Remember that investments mean risks and a safety margin is your best insurance policy.

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Paying Down Debt vs. Savings

The great Canadian conundrum – live for today or tomorrow? In an era when money is tight and many families have to make tough financial decisions, the question of priorities arises. How much should one save for the future? How should one juggle his current needs with future needs?

Certainly, young couples face this dilemma. By trying to squirrel away retirement money and manage a young household, many couples begin to choke. Experts advise that the best strategy is to erase debts before saving money. Start by paying down credit card bills. The result is a guaranteed after-tax return of 18%. No RRSP will offer that rate of return! Try, as well, to whittle down the mortgage. Once these debts are out of the way, you can re-direct the money into your RRSP.

In addition to the debt-first strategy, the next step, once you're ready to invest, is to prepare yourself for the inevitable. Since you can't predict the future, try to be in control of your options as best as possible.

Plan your investments with some foresight. Rather than look for the best deal today, try and decide what your future needs will be and work backwards. Invest in ways that will best fit your needs. Try to find the best mix of stocks and bonds for you and stick to that mix. Markets shift but your long term consistency should work to your benefit. Also, try and limit your risk. Some is necessary but everything in moderation. Consider a 60-40 mix of stocks and bonds. Once a year, take some money from the more profitable side and bolster the lagging side. This way, you will always buy low and sell high.

Remember the sage advice – be in control of your money; don't let your money control you!

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Three Cheers for Canadian Finances

Let's face it – Canada's reputation is not one of the glitzy stars of the world. It is rather conservative, moderate, and perhaps even a bit dull at times. But, those exact qualities allowed the nation to remain strong and secure during the recent recession. At the same time that the U.S. economy has been floundering with no end yet in sight, Canada weathered the storm that lasted just eight months.

Canada's well managed banking sector was a key factor in saving the day. The country's strict regulatory system, combined with a conservative banking culture and superior credit conditions, paved the way for stability. The recession saw the loss of more than 122 banks in the U.S. Not a single Canadian bank closed and none needed bailouts.

Certainly there has been Canadian unemployment. But, our workforce shrinkage of 2.5% was half of our American neighbours.

Let's look at the GDP. Canada's fell 5.4% but that's far less than other nations like Germany's 14.4% fall or Japan that plummeted by a whopping 15.2%.

Sub-prime mortgages dealt a death blow to U.S. banks, comprising almost 20% of the mortgage market. Canadian banks were a lot more cautious and only 7% of the market was comprised of sub-prime mortgages. Furthermore, banks in Canada rarely sold their mortgages and kept a tight reign, thus reducing the risks of default.

Conservative Canadians are more reserved? Quite possibly so, if one considers personal finances. Canadian household debt measures approximately 102% of income while the U.S. ratio is 114%. When Americans had to start repaying their debts, Canadians were able to take advantage of low borrowing rates and boost consumer spending.

Do Canadians have the last laugh? Not really. The recession has hurt everyone and is far from over around the world. But, whereas the great credit bubble burst in other countries, and many are still reeling from the effects of the recession, Canada has shone brightly as a model of fiscal prudence and responsible financial management.
 
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A Stronger Financial System

Ever wonder what happens behind the scenes of banks? For example, how does the bank manage its money?

Part of the system involves banks lending money to one another for short terms. The system is known as repurchase agreements, or repos for short. In order to raise money, a bank sells bonds or other collateral to another bank but agrees to buy back the collateral at a later date. Repos are part of a market that involves traders at the various banks trading with each other and shuffling the collateral back and forth.

All was well and good until the recent recession. The banks began to be leery of the solidity of other banks. The time proven system of trading began to fail, leaving even the healthiest of banks with a potential cash shortage.

Anticipating a possible major blow to the Canadian banking system, the Bank of Canada, together with the country's securities industries, began creating a plan to revamp the system and ensure crucial funding for the country's banks.

The plan involves establishing a central clearinghouse. Banks would no longer trade with each other but, rather, with the clearinghouse. This would eliminate questions of stability of other banks. Also, a central clearinghouse would be able to give a bank a clearer picture of their repos transactions, thus affording the bank a better way to manage its capital.

The Bank of Canada hopes that this new system will begin to be implemented by mid-2010 and will increase the overall safety and solidity of the Canadian banking system.

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Canadian Consumers May Rock Economic Recovery

Recent statements by Bank of Canada governor, Mark Carney, reflect a spirit of optimism but also carry an undertone of warning.

Despite the recession, Canadians have amassed greater debt, due, in part, to the low interest rates currently dominating the market. These rates, currently at an historic low of 0.25%, were set by the Bank of Canada as emergency interest rates in order to resuscitate an ailing economy. The rates will rise eventually and Mr. Carney, as well as other leading economists, fear that many Canadians may be caught short. Mortgage rates have been extremely low for months while housing prices have rebounded. This has created a perfect setting for many Canadians to take on large debts. However, as the economy improves, interest rates may rise, at a quicker rate than they dropped. Mr. Carney is cautioning Canadians that purchasing a more affordable home today may be a wise choice.

One of the early warning signs of Canadians over-extending is the rise in personal bankruptcies. The third quarter of this year showed a 41 per cent jump compared to the same period in 2008. Similarly, the delinquency rate of mortgage payments has risen by 50 per cent in the last year.

The governor emphasized the vulnerability of the country's economy due to household defaults. As consumers are the key drivers to the nation's economic recovery, Mr. Carney, therefore, hazards Canadians about avoiding credit risks. Of course, a similar warning has been issued to lending institutions to properly monitor household credit.

Mr. Carney strongly believes the Canadian economy is definitely on the rebound and he expects Canada to outperform the other G7 countries. However, Canadian households will play a vital role in that economic recovery and the governor hopes that Canadians will act with economic responsibility for the collective good of the nation.
 
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Corporate Social Responsibility: Better to Give Than to Receive

In a business world infatuated with inflating the bottom line, it is a comfort to know that many business leaders have not forgotten their own humble beginnings or the needs of those less fortunate than they.
 
Corporate social responsibility has been gaining momentum across Canada the last few years. Witness the fact that the annual summit conference of the Canadian Business for Social Responsibility attracts an overflow crowd of luminaries from the business world. This year's conference was even graced by the attendance of Prince Charles.
 
Business leaders have begun to realize that giving back to the communities that helped them grow is an essential part of the business cycle. Whether management supports charitable work by their employees on company time, makes available products at huge discounts for those in need, or provides services free of charge, all contribute to helping the people that helped the businesses.
 
This is not to say that corporate social actions are totally altruistic. Being socially responsible is a wise investment that is sure to pay high dividends. A public that perceives the human side of a business is far more likely to identify with it rather than with the cold corporate entity that is far removed from society.
 
Of course, it's not just about management rolling up its sleeves. Many companies encourage their employees to join their social action programs. Quite often, small company programs have a way of mushrooming into larger, community-wide programs. If the spirit is right, most people want to take part.
 
Businesses do have to take care, though, not to overextend their kindness. There is an inherent danger that could arise from wanting to "overdo it". Remember that you are operating a business for profit. Make sure that your needs are met and then begin disbursing from that point on.

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