Manage debt like a pro

By Gillian Stovel Rivers, MA, CFP®, CEA

Senior Wealth Advisor

Surround Wealth Advisors

Assante Financial Management Ltd.

Managing debt can be overwhelming especially when the sources of debt are many, and the terms related to prioritizing them and paying them off can be confusing.

In addition, if we look at the last year and a bit since central bank interest rates were dramatically increased to help combat inflation, many home owners were forced to start paying more on their weekly and monthly payments to keep up with a variable interest rate structure.

The one thing we can see about periods of time when interest rates go up or down, or stock markets go up or down, or bond markets go up or down, or housing prices go up or down… is that they will always go up or down. Your goal in building wealth is to try to learn to work WITH these organic rhythms of the market instead of being intimidated by them. And to do that and manage debt like a pro, you need to learn to master two simple things when it comes to debt:

1. It’s not one or the other, it’s always about balancing Debt Repayment and Savings based on the prevailing economic environment. What do I mean by that? It’s like shifting your weight in the boat so it doesn’t tip but stays steady when seas get choppy. Increasing interest rates don’t keep going up forever, so at that moment, all the weight needs to go to the side of the boat to keep the debt service in check. Once rates level off, you can rebalance to more Savings.

2. See the game of getting multiple sources of debt, down to one source of debt, down to zero sources of debt, as a challenge. Prioritize high-interest debt repayment, especially during rising rates, to save on interest costs. But however you can, always be seeking a lower rate vehicle to consolidate your debts to. For many people this ends up being the mortgage on their house, and so long as expenses and cash flow are being managed responsibly, this is the lowest stress way to take advantage of the lowest interest cost possible while at the same time having ONE debt to pay off. One is so much better than anything more than one.

It's also a good idea to try to maintain a minimum savings buffer for emergencies, even while aggressively paying down debt. This way you avoid the risk of constantly taking on MORE debt.

Now that we have laid out how to prioritize and systematically pay down and pay off all of our debts, it helps to have a few other rules of thumb to work with pertaining to interest rates. Here’s a breakdown:

1. How to manage your debts during Rising Interest Rates (ie. early 2022 to early 2023):

   1. If you have existing debt with a variable interest rate, rising rates can increase your repayment burden.

   2. Consider prioritizing debt repayment, especially high-interest debt like credit cards or variable-rate loans, to avoid accumulating more interest over time.

2. How to manage your debts during Falling Interest Rates (ie. late 2024 onwards):

   1. Falling rates can be an opportunity to refinance existing debt at lower rates, reducing your overall interest burden.

   2. Evaluate refinancing options for mortgages, student loans, or other debts to take advantage of lower rates.

3. How to choose savings and investment vehicles during Rising Interest Rates (2022):

   1. Savings accounts and fixed-income investments may offer higher returns during rising rates, making saving more attractive.

   2. Focus on building emergency savings or investing in fixed-income securities that benefit from rising rates.

4. How to choose savings and investment vehicles during Falling Interest Rates (2024+):

   1. Traditional savings accounts and fixed-income investments might yield lower returns during rate decreases.

   2. This might be a good time to explore other investment options like stocks or real estate to potentially generate higher returns in a lower-rate environment.

Given that we are likely entering a period of Falling Interest Rates over the coming month and year, the pressure might start to feeling like it’s finally coming off, giving you an amazing opportunity to take charge of your debts and restructure them if possible to take advantage of lower rates.

This might mean getting aggressive about switching credit card companies to those offering switching incentives for a period of time (ie. low rate for the first 12 months means you can really work off the principle faster), or working with your bank or financial institution to get a secured line of credit on your home with which you can pay off higher interest rate debts like credit cards. After that, every payment

you make will go more to paying off the principal amount and less will go to service the interest, and you’ll be on your way to getting rid of some of those high-rate debt obligations.

When it comes to how much you should put towards debts versus how much to save, ultimately, the decision to manage debt versus save should be based on individual circumstances, risk tolerance, and the specific impact of changing interest rates on your financial situation.

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Gillian Stovel Rivers is a Senior Wealth Advisor with Assante Financial Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. Please contact her at (905) 335-1950 or visit www.surroundwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Financial Management Ltd. is a member of the Mutual Fund Dealers Association of Canada.

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