The basics of personal finance never change – spend less than you make and save or invest the rest. What changes, constantly, are the economic factors that influence your ability to do the right thing with your money. Let’s take a look at some of the economic trends that are likely to have an effect on your finances in 2020:
The worrisome job market
Rising unemployment destroys financial stability, especially in households with a lot of debt. Fortunately, we have an unemployment rate that is low by historical standards at 5.9 per cent. Unfortunately, the surprise loss of 71,000 jobs in November boosted the jobless rate to that level from 5.5 per cent in October.
The job market was strong through much of 2019, so the reversal late in the year could be a passing thing. If it’s the beginning of a weakening trend for employment, you’ll want to assess your vulnerability to a job loss or reduction in hours worked. Having cash in a savings account is your best defence. If you don’t have a cash cushion, think about building up your savings ahead of investing.
The worsening strain on borrowers
Interest rates were chopped lower in the last recession and its aftermath to encourage spending and investment by consumers and business. Consumers leaped at the opportunity and, until 2019, there were few signs that the growing debt load was too much to handle.
Then came a sharp uptick in the number of insolvencies, in which people either declare bankruptcy or make a consumer proposal to repay some of their debts over time. Insolvencies were at a low level before, so the increase may not be as alarming as it seems at first glance. But there are other signs of debt fatigue.
One of them was reported by CIBC Economics late in the year – a rise in the number of people with low credit scores (below 680). Canadians still have very good credit scores for the most part, but there’s been some slippage in the number of people staying on top of their debts by paying on time.
If you’re late on payments, intervention now can help you avoid insolvency later on. See a financial planner or a non-profit debt counselling service to find out about budgeting and debt consolidation loans.
Stable interest rates
There is no upward pressure on interest rates, which is comforting because the last round of rate increases (in 2017-18) has been linked to the uptick in insolvencies in 2019. Economists have speculated about the potential for a rate cut, but we’ll only see lower rates if concern about a recession builds.
The low-drama rate outlook serves borrowers well by allowing them time to hammer down debts such as home equity lines of credit without the burden of having a rate hike increase their payments. Savers, what you see today in returns from savings accounts and guaranteed investment certificates is likely to be what you get in 2020. Use a website such as Canadian High Interest Savings Accounts to make sure you’re getting the best rates possible (highinterestsavings.ca/chart).
Flat yield curve
This is the term economists use to describe a situation where the interest rate on short-term borrowing is the more or less the same as for the long term. Normally, short rates are lower. A flat yield curve makes five-year fixed rate mortgages a good value. One-year mortgages are at roughly the same rate in late December, and variable-rate mortgages were a touch more expensive.
If you’re buying GICs, you’ll notice just a modest benefit to locking in for five years. The main appeal of going longer than one year is to avoid the risk of having to renew at lower rates in a year’s time.
House prices increased between 5.5 per cent and 15 per cent on a year-over-year basis in cities as geographically scattered as Winnipeg, Toronto, Montreal and Halifax in November. Nationally, prices rose by 8.4 per cent. Somehow, despite questions about the job market and the strain on borrowers, house prices are once again charging ahead.
Too much emotion gets packed into housing decisions. People feel as if they’re missing out on a great wealth-building opportunity if they don’t own and they have to listen to endless guff from parents and others who are uninformed about the viability of renting. Don’t let a hot housing market draw you into home ownership before you can properly afford it.
As ever, the definitive tool for measuring the affordability of a home purchase is the Globe’s Real Life Ratio Calculator.