With interest rates soaring, these cherished personal finance rules are invalid – The Globe and Mail

Low interest rates have ruled personal finance for more than a dozen years, and those who paid attention were bigtime winners. But that chapter in the financial history of Canada is over. As in, o-v-e-r. Toast. Finito.

To counter inflation, interest rates are rising at an alarming pace. As a result, we need a rethink on some rules of personal finance that use low rates as a base assumption:

Investing is a better use of your money than paying down debt

The Canadian stock market was up about 30 per cent in total over the past two years, while the interest rate on money borrowed on a mortgage or home equity line of credit was easily below 3.5 per cent. If you had some spare cash, using it to invest was by far the more rewarding choice over paying down debt.

It was never a bad move to pay down your borrowings – the results are guaranteed to benefit you in reduced interest and a sped up timeline for becoming debt-free. But investing was the choice that produced gains you could wrap your hands around.

We had a great run for stocks – hope you enjoyed it. In the months ahead, expect extreme volatility driven by hopes of postpandemic economic renewal butting up against inflation, rising interest rates and concern about a recession. We’ve seen just this sort of market environment last Friday and on Monday.

The risk of a bad investing outcome is rising and so are interest rates. The advantage of debt paydown over investing grows day by day.

All that matters is the monthly payment

Whether you’re buying houses or vehicles, the affordability measure preferred by most people is the dollar amount of the monthly payment. When interest rates are stable, this approach works well enough. But as we’re seeing in 2022, payments can get uncomfortable in a hurry.

Rates are rising with an urgency most borrowers have never seen or imagined. If you have floating-rate debt like a line of credit, floating rate loan or adjustable-rate mortgage, your cost of borrowing is at risk of increasing on each Bank of Canada rate-setting date. The next date the bank could raise rates is July 13. After that, there’s Sept. 7, Oct. 26 and Dec. 7.

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Source: https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-with-interest-rates-soaring-these-cherished-personal-finance-rules-are/

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