Personal debt is a financial challenge
June 10, 2021
Household debt is the most significant financial risk for some families, writes Peter Watson.
Managing personal debt could become the most important financial challenge for many households.
Historically the two most significant financial objectives were preparing for retirement and saving enough money to help children with the cost of post-secondary education. These two priorities will likely continue.
However, now we have entered an era of alarming personal debt. If debt levels are out of control, it could overshadow other family financial priorities.
Debt for many is their immediate financial concern.
For at least the past decade the federal government and the Bank of Canada warned us that personal debt levels were getting alarmingly high.
Then along came the pandemic and many families faced harder economic times than others. Some will have assumed more debt.
Interest rates are at an enticing low level that makes borrowing very attractive. People are buying houses that have become more expensive than ever before.
Be careful, interest rates could increase.
Recently, Statistics Canada reported an increase in the inflation rate to 1.8 per cent. The Bank of Canada targets an inflation rate of 2-per cent.
If inflation rises above 2-per cent the most probable way to slow down the economy will be to increase interest rates. That for some could lead to debt payments beyond their financial ability.
Adding fuel to the fire will be governments, both in Canada and around the world, rolling out significant stimulus packages. This is needed to prop up lagging economies that have suffered because of the pandemic.
That will likely fuel additional inflation. Again, the way to fight inflation is by increasing interest rates.
Acknowledging there are strong forces in our economy that could lead to higher interest rates is meant to warn families of what financial difficulties they could face.
Managing household that is something we recommend you consider carefully.
Peter Watson, of Watson Investments MBA, CFP®, R.F.P., CIM®, FCSI offers a weekly financial planning column, Dollars & Sense. He can be contacted through www.watsoninvestments.com