May 2022 interest rates

How To Cope With Increased Interest Rates, Supply And Demand Shortages Plus Overall Price Hikes As We Come Out Of The Pandemic

Many Canadians are facing the uncertainty of rising interest rates, global supply shortages, and overall rising living cost due to inflation amidst the reality of post-pandemic. In this article, you will learn how inflation works and how to best navigate your financial decisions in times of uncertainty. Marble is the perfect sidekick to help you on your journey to financial fitness. We'll provide you with the resources and support you need to get out of debt and save money. If you're not sure where to start, all you need to do is take our financial persona quiz and we'll create a personalized action plan for you. We know how important a sense of support is when it comes to debt problems and, with Marble, you'll have access to a community of other savers who can offer advice, support, and motivation!

First, On Inflation

Generally, people associate inflation as the rising price of stable set of products they buy every month and every year. Inflation can also be caused by a decrease in purchasing power of money. When the money you have loses value, you can’t buy as much as you could previously. Inflation is something that affects everyone differently because not everyone buys the same baskets of goods and services. You can determine how inflation truly affects you by tracking prices of set of goods and services you purchase every month and every year. 

So, how did this happen? When the pandemic started, many provinces (and many other jurisdictions around the world) began implementing lock down policies to avoid the spread of the virus. While this helped keep people safe, it had a negative impact on production in certain critical industries. With shortage of goods being produced combined with the increase in money supply as the government issued additional funds to support the economy -- led to inflation. Suddenly, people found their money did not go as far as it used to. While inflation can sometimes be good for stimulating economic growth, too much inflation can be detrimental. It is crucial for central banks to monitor the situation closely and act accordingly if inflation gets too high.

With inflation on the rise and cost of living seeming to increase every day, it is normal to feel a sense of financial insecurity or some form of unwarranted budgetary restrictions. In a time when so much is out of our control, it is more important now than ever to be savvy about your spending and look for ways to cut cost to help ease financial anxiety and better weather troubling times. 

What The Government Is Doing About Rising Prices 

Inflation is a word that can strike fear into the hearts of many. It is one of the most insidious forces in our economy, slowly eating away at our purchasing power and eroding our standard of living. But what can be done to stop it?

The answer is twofold: first, the government can target people with lower incomes and stimulate economic growth so that there are jobs and a willingness to pay higher wages. By stimulating economic growth and creating jobs, the government can help increase wages and make it easier for people to afford the things they need. In addition, governments can attempt to negotiate with manufacturers of certain goods, so they do not make more profits at the expense of some essential goods. By taking these steps, the government can help ease the burden of inflation on those who are struggling the most.

How To Cope With Overall Price Hikes And Save The Money

1. Avoid Unnecessary Credit, Keep Debt Under Control

If you are one of many people struggling with debt, you’re not alone. In fact, about half of Canadians are in debt and on the verge of bankruptcy. While it may be tempting to put everything on credit, it is best to avoid unnecessary credit to avoid taking on any additional unnecessary debt. It can be tough to stick to this discipline and develop healthy financial habits under stress, but it is essential if you wish to keep your debt under control. 

2. Other Opportunities to Increase Income

Not sure where to start with increasing your income? The most common way is to ask for a raise from your current employer, or possibly look for a new job that could potentially pay you more. If you are really struggling to make ends meet, it might be worth taking a temporary part-time role to stay on track. If you’re finding difficulty in doing the above, another option is to invest in yourself. As economists say, human capital is the most valuable asset. Of course, it’s not always easy to find the time or money to learn new skills. But if you’re serious about increasing your earning potential, it is worth considering. After all, as the saying goes: invest in yourself – it will pay off for the rest of your life.

3. Proactively Save Money

There is no question saving money is important to reach your financial goals, whether that be paying down your debt, saving for a house, a car, or even retirement. Many Canadians have no savings or struggle to save, now might be the best time to assess your spending habits and figure out where you can cut back and save some money. Keep in mind, every little bit helps and the habit of saving money is essential for financial stability.  

4. Save for a Rainy Day

When it comes to financial planning, experts have different opinions on how much cushion you should have. Some say 3-6 months’ worth of expenses is a good rule of thumb. Ultimately, the answer depends on your personal circumstances and comfort level. But one thing is certain: it’s always good to have a little bit extra set aside for unexpected expenses. If you are looking to grow your expenses, investing is one potential solution. Investing your money is one of the smartest things you can do for your future. Not only will you be prepared for financial contingencies, you could also see your savings grow over time. However, before you start, it is important to understand your risk tolerance because it is key to finding the right investment strategy for you. 

What Is The Interest Rate And How Does It Affect Our Lives

The Bank of Canada's interest rate directly affects various sectors of the economy and everyone's finances. At the end of April of this year, it became known as Canada's central bank may raise the interest rate by another 0.5%. 

What Does It Mean When The Interest Rate Goes Up And Down

The interest rate is the minimum interest rate the Bank of Canada lends to commercial banks. It is the main instrument of monetary policy. Having received a loan from the Central Bank, commercial banks lend to companies and retail consumers at their interest rate, slightly higher than the Central Bank's interest rate. Hence, one of the ways major financial institutions make their profit. 

Interest rates is one of the tools that allows the central bank to control the exchange rate of the Canadian dollar and influence the economy. A low rate means money is cheap. As a result, companies and people take loans more actively, and businesses and economies develop. But on the other hand, the negative effect of this policy may be the growth of inflation. Money is cheap, so it becomes a lot. Hence, less value.  

The consequences of a low-interest rate:

✔️ low lending rates;
✔️ low rates on bank deposits;
✔️ growth of the economy and manufacturing;
✔️ increase in purchasing power;
✔️ increase in inflation.

The Central Bank's interest rate increase is usually caused by the desire to control and reduce inflation. However, at the same time, an increased rate also has negative consequences: the population's purchasing power and the pace of economic development sag.

The consequences of a high-interest rate:

✔️ high lending rates;
✔️ high bank deposit rates;
✔️ economic and production slowdown;
✔️ lower purchasing power;
✔️ lower inflation.

Demand And Supply Shock

The Coronavirus pandemic has plunged the world into an economic crisis of unprecedented magnitude. The full extent of the damage is still unknown, but the impacts will be far-reaching and long lasting. The pandemic led to the severing of economic ties and closing of borders, many of which seemed transparent forever. Moreover, it produced a supply shock, a phenomenon the world had not encountered for half a century. The closest analogy is the situation in the early 1970s, which arose due to the Arab oil embargo and triggered a decade-long structural crisis.   

The intertwining of demand and supply shocks is the most critical feature of the global crisis that predetermines its structural nature. As the experience of the last century and a half has shown, such crises are not frequent — once in several decades. But if you're financially literate, you overcome any crisis much more effortlessly and without any financial stress. And that is what we will talk about in the final paragraph of this article. 

Why Is It So Important To Be Financially Literate These Days

In a world where everything is about money, it's important to be financially literate. Financial literacy makes it possible to understand how the financial side of life works, what to do in certain events, and evaluate your options accordingly. A "must-have" program for financial literacy should include the basics of money management, including budgeting, saving, and investing. While there’s no one-size-fits-all solution, with a solid foundation in these key topics can empower you to take control of your finances and start building a brighter future. 

1. The right approach to money. Money is an important part of our lives, but it shouldn’t control us. We need to take control of our finances and our future. That starts with seeing money as an investment, not just something to be spent on consumption. 

2. Financial planning and accounting. It is necessary to start small, i.e., with oneself, with one's budget, and then gradually move on to family budgeting and accounting of household finances. Thus, starting with essential planning and accounting, we program ourselves to keep records in the future, which positively affects our standard of living. 

All this makes it possible to be aware of financial movements, to use available money rationally, and most importantly, to save and accumulate capital for investment in the future. 

3. Spend less than you earn. Of course, there can be many objections to spending less on our salaries. But with proper planning and accounting of finances, you will be able to do it. A small amount per month will become a large amount in a year.

4. Good relationships with banks. You must see the bank as a financial partner only and conclude mutually beneficial cooperation with it. I mean deposits. A deposit is a secure tool for keeping savings and capital. But loans are evil in most cases. Living on credit means gradually slipping into a financial pit. To avoid this, read our blog article on quickly improving your credit score in Canada.

Try to be rational in your choice of financial institutions as well. Choose reliable partners with many years of experience in financial markets and foreign capital. Remember the main rule: your money must work for your benefit, not lie as dead weight.

4. Passive income. A person can have two earnings: active — from his main job, and passive — is the result of his investment. Diversified earnings help in force majeure situations, additional capital. 

5. Be guided in the world of finance. Attend training and seminars, and read the corresponding literature. Invest in yourself and your development. In time, it will more than pay off.

6. Be sure to prepare yourself a safety cushion. You can fall ill, lose your job or get tired of the endless race for money and take time out. But with all that said, you need money to meet basic needs. Back yourself up. Even setting aside at least 10% a month of your paycheck, you'll have impressive savings in 10 years.

Conclusion

Financial wellness makes it possible to understand how the financial side of life is arranged, what makes certain events happen, how a person's life will be affected by what is happening in the state, and what consequences this or that step with their own money will lead to. So, to minimize the risk of getting into a difficult financial situation, we strongly recommend getting the fundamental basics of economics, budgeting, and financial literacy for personal improvement on the mymarble website.