Life With Low Rates

An opinion piece by Jerry

With the Federal Reserve in the U.S. announcing that rates will be kept low until into 2013, Canada's own government bond rates have dropped and will most likely stay relatively low for the next year and half as well.

What does this mean?  With an almost guarantee of low rates for the next few years this will mean something very different to 2 groups - the savers/investors and the borrowers.

Savers & Investors - Low rates mean low returns on the safest investments.  This means bonds, GICs and term deposits.  With so many baby boomers looking at retirement over the next dozen years (or much sooner) they want a good return to build up their retirement fund.  The reality is that returns will be low, unless they go into riskier investments like mutual funds and stock markets.  However, principal and returns are not guaranteed with mutual funds and stocks, so investors need to be careful how much of their portfolio they put into the riskier investments while hoping for higher returns.

Extra Payments Pay Off

Taking a mortgage out over 25 years or more helps make the monthly payments more manageable, but by extending out the loan for so long you really increase the amount of interest you pay. 

To help reduce the total interest you pay on a mortgage (or any loan) I would encourage you to make extra payments.  If you get a tax return or a bonus, make sure at least some of it goes to repaying debt.  High interest debt, like credit cards, gets top billing as my first recommendation for extra payments, but reducing mortgages help long term as well.

For example, if you have a $10,000 credit card balance at 19%  annual interest (store cards range from 24% to 28%) and have to make the monthly interest payment and the monthly minimum principal payment of 2% (some are 3%) with a minimum payment of $20, you will pay the credit card off after 13.5 years and will have paid over $7,500 in interest.  If you can make an additional payment of $600 each year in the first 5 years you will knock off over 3 years of payments and save over $2,300 in interest.  It is well worth your time and money to try to pay off credit cards quickly, and not add to the credit card debt as you pay it off.

Risky Market News

Stock markets have dropped a lot in the past 2 weeks.  Term deposit and savings account interest rates are dropping as well.  What do you do when the world seems crazy?

Evaluate your risk tolerance - The markets go up and down, sometimes rather dramatically, but over the long term they tend to go up.  If the ups and downs of the current market keep you awake at night, your investment portfolio is probably too heavy in the markets.  Everyone wants a great return, but a great return also means a great risk.  Low risk means low returns, so you want a balance.  You need some risk if you want to earn better than inflation returns.  Before you invest anything a financial advisor should go over what kind of risk you are comfortable with for your investments.

Look at your time frame - If you are retiring in less than 5 years, than you should not be putting much of your portfolio at risk because you may not have enough time to recover if the markets have a bad few years.  A good financial advisor will warn you of this.  If you are planning to continue to invest or do business for at least 10 years then your portfolio can be in the riskier investments (with higher potential return) because it is more likely if the markets go down that your portfolio will have time to recover.  By looking for returns over the next 10 or 15 years you can afford to take a little more risk today.  Concentrating too much on the short term means you will be constantly anxious about what is happening.  Investing is best done over the long term, not in a short burst of a couple years before retirement.

6 Ways to Save $ at College

Going to college or university costs money.  Tuition and books prices have been increasing at about 2 to 3 times the annual inflation rate for the decade and a half.  In Canada tuition is kept relatively low because universities and colleges are heavily subsidized by the federal and provincial governments.  Usually the greatest costs for students are not directly related to school: rent, food, vehicle and entertainment.

Here are 6 ways that students can save money while going to school:
1.   Room mates.  A 2 bedroom apartment can cost over $700/month, plus some utilities, meaning just living quarters are about $450 per month.  If there are 2 people per bedroom, you cut the cost per person down below $250.  I once shared a house with 6 guys, and our rent was down to $150 a piece.  It worked well for us since most of us were at the library, lab or work most of the time anyway.