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Are you stressed about inflation and interest rates? - DFSIN - SFL

Are you stressed about inflation and interest rates?

Six ways to manage stress about your personal finances in a challenging economic environment.

October 25, 2022

After making it through a pandemic that upended our usual way of life both at home and at work, we as a society are now faced with steep inflation and rising interest rates – not to mention market volatility. If you’re worried about the impact this series of events might have on your financial security, be aware that there could be ways to feel greater peace-of-mind about your finances.

Here are six of them.

1. Take stock

First of all, it might be reassuring to put things into perspective and realize that you’re not alone: in a survey done for FP Canada, fully half of respondents said that they lost sleep over their finances, 38% reported experiencing physical or mental health problems, and many people reported other impacts on their lives.

Table showing results taken from an FP Canada survey of Canadian respondents, 51% of whom said they had lost sleep over their finances. Among the main impacts of this financial stress, 31% named health problems, 7% substance abuse and mental health challenges, 15% marriage or relationship problems, 15% family disputes, and 14% distraction and reduced productivity at work. Other impacts were cited by 8% of respondents, 37% said there was no impact, and 11% said they didn't know or preferred not to answer.

In this regard, did you know that the World Health Organization has declared October 10 to be “World Mental Health Day”? Some psychologists say that planning an annual day off to get away from the usual grind and take stock of your situation can help to put things in perspective. For example: recognize that you personally can’t control the cost of living, interest rates and the stock market, but, on the other hand, some things that you can control could make a big difference.

2. Ask for advice

A number of studies done in recent years have shown the importance of professional advice when it comes to financial security and peace-of-mind. Individuals who work with a professional able to provide them with a financial plan seem only half as likely to view finances as their main source of stress. As well, during the pandemic, these people reported feeling less stressed about their finances and more optimistic about the future. So it might be a good idea to have a chat with your advisor in order to update your planning and adjust any elements that might be drifting out of your “comfort zone.”

3. Develop a budget

Basically, a budget lets you accurately quantify what money you have coming in and going out. It can help you spot expense items that could create a major imbalance and identify corrective measures. For example, without necessarily eliminating an expense entirely, you might set weekly and monthly limits on it. You might also become aware of the annual cost of certain habits, such as the morning cappuccino at your favourite cafe, or the subscription to a streaming service that you rarely use. That’s the purpose of a budget: to eliminate vagueness and uncertainty.

4. Control your debts

As part of this exercise, you could also accurately measure the cost of any loans you’ve taken out: consumer loans, credit cards, lines of credit, and so on. In the past few years, Canadians have allowed their debt load to climb to $2,320 billion, an annual increase of over 8%, based on the latest figures. As interest rates rise, this debt is continuing to increase under its own weight, with individuals no longer able to pay off their balances. One option to consider with your advisor might be to dip into your reserves. For example, you might look at “borrowing” from your tax-free savings account (TFSA) to stabilize your debt situation. Once things are under control, you could recontribute the money to your TFSA.

5. Review your investment strategy

Certain investment solutions might provide some peace-of-mind when prices are extremely volatile. For instance, there are people who sleep better knowing that, at the very least, their capital is guaranteed. If you are one of them, you could ask your advisor to suggest structured products that, while correlated with the performance of certain asset classes, still offer protection in the event of a market decline. There are also products – guaranteed investment funds – that guarantee your capital while allowing you to “lock in” returns by adding gains to your guaranteed amount. This is a potentially interesting option in a context of inflation and volatility.

It also could be, quite simply, that recent events may have made you aware that your risk tolerance is lower than you thought. In this case, your advisor could help you redefine your investor profile and adjust your asset allocation.

6. Protect your back

Finally, it might be appropriate to review your contingency plan, i.e., the strategy that will allow you to maintain your standard of living and peace-of-mind if something were to happen to prevent you from making a living. This kind of strategy is usually based on a few months’ income in an emergency fund and some appropriate insurance solutions.

As we can see, financial stress often grows out of uncertainty. These six suggestions could help mitigate that uncertainty.

The following sources were used to prepare this article: 
Autorité des marchés financiers, « Assurance invalidité ». 
Advisor’s Edge, “How can structured notes benefit investors?” 
Desjardins Insurance, “Guaranteed investment funds.” 
FP Canada, “FP Canada™ 2021 Financial Stress Index”; “Money is still the top source of stress for Canadians - and many feel less hopeful about their financial futures.” 
Government of Canada, “Making a budget”; “Resources to help improve your financial well-being”; “Setting up an emergency fund”; “Your Financial Toolkit.” 
Le Devoir, “Nouvelle hausse de l’endettement des Canadiens.” 
The Globe and Mail, “An argument for cracking open your TFSA.” 
Very Well Mind, “When You Should Take a Mental Health Day.” 
World Health Organization, “World Mental Health Day 2022.”