Low Interest Rates: Good or Bad?
Last night I was on the Alberta Primetime Money Panel and one of the questions we were asked was whether Canada will increase or decrease interest rates. There has been a lot of media speculation about interest rates and many pundits for a while have felt that rate need to rise but now with the debt situation in the US and their commitment to maintaining low rates, there is new speculation that we may see low interest rates in Canada.
The truth is I have no idea whether interest rates will increase or decrease. I’m not an economist and nor do I want to be one. I do think that rates need to stay low because debt levels are too high. significant increases in interest rates could push a lot of people into foreclosures and bankruptcy.
From a personal finance perspective low interest rates present Canadians with some key strategies for debt reduction in a low interest rate environment
- Pay down debts. Paying down debts in a low interest environment allows you to pay down debt faster because more of your payment goes to reducing principle. Let’s say for example, you have a $50,000 debt at 6% interest and you are paying $550 per month for that debt. It will be paid off in 10 years. But if rates fell to 4% and you kept the payment the same, that debt would be paid off sooner by more than 1 year.
- Control your spending and don’t go into more debt. From an economic perspective, low interest rates is good for the economy because it fosters consumer spending. This is an example of short term gains for long term pains and the debt situation we are seeing around the world is a prime example of the consequence of consistent overspending over years and decades. If there is one thing we as individuals can learn from this is there is no free lunch. The only way to succeed financially over the long haul is to watch your spending and spend less than you earn. The current economic environment should be an alarm clock for people waking them up from the dream of spending more than we make and having no consequence.
- Consolidate your loans (but don’t forget #2). Low interest rates also create an opportunity for Canadians to consolidate high interest debt into low interest debt. A lower interest on debt is a good strategy to paying down debts faster so consolidation loans are feasible as long as you don’t continue to overspend and accumulate more debt on credit cards and other high interest debt vehicles.
Guessing whether interest rates go up or down, is really a waste of time because it’s something that we cannot control nor predict. I always so focus on what you can control. In this case, it’s about controlling your spending so you can use more of your cashflow towards debt reduction. Paying off debt can be one of the best investments you make. That’s a guaranteed winning strategy!