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

• 
• 
• 
• 
• 

  Share this Story: Questions to ask yourself when allocating money to debt repayments, savings and investments

  • Copy Link
  • Email
  • Facebook
  • Twitter
  • Reddit
  • Pinterest
  • LinkedIn
  • Tumblr

Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.

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.

Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.

A welcome email is on its way. If you don't see it, please check your junk folder.

The next issue of Financial Post Top Stories will soon be in your inbox.

We encountered an issue signing you up. Please try again

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?

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 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.

Household makeover: a financial success story to show how you can live within your means

Forget the corporate PR campaigns, here's how to really save on groceries

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.

_____________________________________________________________

 If you like this story, sign up for the FP Investor Newsletter.

_____________________________________________________________

Email

Facebook

Twitter

Reddit

Pinterest

LinkedIn

Tumblr

Trending

1. TekSavvy asks CRTC to review legality of Rogers-Vidéotron deal

   

   Wait, what? Wyoming lawmakers push to ban all electric vehicles by 2035

   

   Taxpayer tries to claim parking costs as medical expense, claiming discrimination for travelling short distances

   

   Diane Francis: Liberal Canada is in sore need of a change in management

   

   Remote work 'doesn’t work' for younger staff, management, Jaime Dimon says

   

   It's time for investors to change their thinking if they want to get to the finish line

   Few are asking what happens if interest rates stay where they are

   

   Battered 60/40 portfolios face another challenging year

   Investors will have to hold far more diverse portfolios to deliver similar returns to their long-term averages

   

   Advertisement 1

   Story continues below This advertisement has not loaded yet, but your article continues below.

   ECN Capital Schedules 2023 Investor Day

   TORONTO, Jan. 19, 2023 (GLOBE NEWSWIRE) — ECN Capital Corp. (TSX: ECN) (“ECN Capital” or “the Company”) will hold its annual Investor Day on Wednesday, March 8, 2023. The format will be fully virtual with presentations given by management of ECN Capital as well as each of its operating subsidiaries beginning at approximately 12:30 p.m. EST and run consecutively. ECN will hold a virtual live Q&A following the day’s presentations at approximately 4:00 p.m. EST.

   

   High for longer? Watch out for 'hawkish signal' from Bank of Canada next week: Capital Economics

   Capital Economics thinks central bank will indicate rates need to stay higher for longer to crush cost pressures

   

   UK Employers Step Up Hiring Despite Drop in Consumer Confidence

   UK employers unleashed a hiring spree at the start of 2023 even as consumer confidence about the economy stalled, two separate surveys showed.