Several years ago, I wrote about the impact of rising interest rates on our personal finances. Market conditions are changing again, and it is time to revisit this topic.  

Canadians have enjoyed low interest rates for an exceptionally long time. Many of us have taken advantage of “free” money by borrowing and leveraging our financial position. Inflation has sky-rocketed, and it is taking a sizable chunk out of our wallets. In Canada, and in other parts of the world, financial conditions are about to change very quickly. This will have an impact on our personal finances. 

The Bank of Canada who carries out monetary policy by influencing short term interest rates has signaled rate hikes for 2022. How many will there be? Experts say 2-3 but we do not really know. Some experts anticipate between 3-4 rate hikes this year and the pace will be aggressive. We saw something like this back in 2017 when the Bank of Canada announced its first interest rate increase in seven years. But this time the outlook is different. 

Large mortgages and credit card balances 

Canadians have record high debt levels. Many of us are carrying large mortgages, balances on credit cards and lines of credit, and find it challenging to meet monthly financial obligations. 

How rising interest rates will impact each of you will depend on your job security, debt level, and savings. But what is clear, the cost of borrowing is about to get a lot more expensive, and this will impact your monthly cash flow. 

It is not all doom and gloom because there are steps you can take to prepare yourself for what is next. Let us figure out where you stand and take stock. 

Update or create a budget 

If you want to have a good handle on your personal finances, you must have a budget that you will stick to. It is really empowering to know how much money is coming in, and how much money is going out. Knowing this puts you in control of your money and empowers you to make good financial decisions. And it will help you manage your cash flow better. 

If you find yourself with a monthly financial shortfall in your budget, you will need to figure out ways to cut unnecessary expenses. For most people, it is a matter of adjusting spending and increasing savings. 

As interest rates rise, managing your debt will become more expensive and will increase your financial obligations. Adjust your budget to reflect this event. 

Get financial advice 

There is no shortage of financial advice online and/or via social media. It is sometimes hard to know the difference between good and bad advice. Seek out accredited financial professionals. 

Set financial goals 

Boost your emotional well-being and set new financial goals – whether that is to save more money, buy a new home, become debt-free, or both. Or you may want to recalibrate existing goals that you have outgrown or no longer seem relevant. 

Get a financial plan 

Regardless of whether you are saving to buy a new home or planning for your retirement, a financial plan will take your goals and create a road map to success. There are free tools online and that will take only a few minutes to complete. 

It is a big wake-up call when interest rates rise because borrowing costs become more expensive. Act now and protect yourself from rising interest rates and financial shocks. Put your personal finances to a stress test. 

Updated: January 21 2022