The most important financial move you can make in the next six months is to get your debts under control.  Why?  Because the biggest risk to ordinary Canadians in the coming years will be rising prices.  Inflation is sleeping right now but it is not dead, according to Bejamin Tal from CIBC World Markets.

Pay off your credit cards, pay down your line of credit, and if you’re buying a home, be careful not to max out on your mortgage payments. Tough times are coming and the people who get through them in the best shape will be the ones who prepared properly by getting their household debt under control.

To understand what’s ahead, you have to look past the current economic environment into 2009 and 2010. Two themes to think about: rising inflation – we’re talking serious inflation here – and rising interest rates.

Benjamin Tal, a CIBC World Markets economist said “The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates.”

Gasoline and food are your two prime worries. CIBC World Markets issued a forecast last week that gasoline prices would double to $2.25 a litre by 2012, and that food price inflation would soar from current levels. No doubt you’ve come across many other instances of high inflation in your own life.

Mr. Tal believes the inflation rate in 2009-10 will get to the 3- to 4-per-cent range, which sounds like no big deal for anyone who lived through the double-digit rates of the early 1980s. Still, that’s roughly double the rates we’ve seen in the past couple of years and, as such, it’s going to force the Bank of Canada to raise interest rates.

There are warnings of financial stress to come, though. Interest paid on mortgages and other forms of consumer debt has been soaking up an increasing proportion of household cash flow. Until recently, this didn’t seem to be much of a problem because personal wealth was rising faster than debt. But with falling stock markets and a slower pace of growth in home prices, debt has been growing faster than the value of household assets.

A little borrowing in your life is pretty well unavoidable. Not many people can buy a car these days with cash and, as for houses, forget about it. The trick is to keep your overall debt load manageable.

Lenders figure you’re carrying too much debt if your monthly housing costs, including mortgage payments, property taxes and heating, plus all your other monthly debt payments eat up more than 40 per cent of your gross monthly income. Housing costs alone are supposed to account for no more than 32 per cent of your gross monthly income.

Therefore if you are buying a home, which in most markets in Canada is still a good buy due to the market slowdown price corrections are inevitable, then consider a longer term amortization to start so that your payments are manageable as we navigate the next couple of years, and then with accelerated bi-weekly payments, and periodic principal payments you can take your amortization from 40 to 25 years and lower once we weather the inflation storm.

Interest rates on credit cards are just under 20 per cent in many cases, so pay off your card debt first. Then, get your line of credit down to a level where the payments combined with all your debts are manageable enough to give you some breathing room for higher rates and spending on things like gasoline and food.

With the income tax deadline coming up tomorrow, a lot of people are going to be receiving refund cheques in the weeks ahead. They could do a lot worse with the money but paying down consumer debt.  It is akin to boarding up the windows to prepare for a hurricane.  Not sure if it will hit or how hard, but I am preparing anyway.

What should your mortgage strategy be?  Take a deep discounted  variable rate mortgage for the balance of 2008, with an eye toward locking in to a fixed rate in early 2009, depending on how inflation and consequently Bank of Canada rates  are doing.

The most important financial move you can make in the next six months is to get your debts under control.  Why?  Because the biggest risk to ordinary Canadians in the coming years will be rising prices.  Inflation is sleeping right now but it is not dead, according to Bejamin Tal from CIBC World Markets.

Pay off your credit cards, pay down your line of credit, and if you’re buying a home, be careful not to max out on your mortgage payments. Tough times are coming and the people who get through them in the best shape will be the ones who prepared properly by getting their household debt under control.

To understand what’s ahead, you have to look past the current economic environment into 2009 and 2010. Two themes to think about: rising inflation – we’re talking serious inflation here – and rising interest rates.

Benjamin Tal, a CIBC World Markets economist said “The story for 2009, and potentially 2010, is inflation. With inflation we will have higher interest rates.”

Gasoline and food are your two prime worries. CIBC World Markets issued a forecast last week that gasoline prices would double to $2.25 a litre by 2012, and that food price inflation would soar from current levels. No doubt you’ve come across many other instances of high inflation in your own life.

Mr. Tal believes the inflation rate in 2009-10 will get to the 3- to 4-per-cent range, which sounds like no big deal for anyone who lived through the double-digit rates of the early 1980s. Still, that’s roughly double the rates we’ve seen in the past couple of years and, as such, it’s going to force the Bank of Canada to raise interest rates.

There are warnings of financial stress to come, though. Interest paid on mortgages and other forms of consumer debt has been soaking up an increasing proportion of household cash flow. Until recently, this didn’t seem to be much of a problem because personal wealth was rising faster than debt. But with falling stock markets and a slower pace of growth in home prices, debt has been growing faster than the value of household assets.

A little borrowing in your life is pretty well unavoidable. Not many people can buy a car these days with cash and, as for houses, forget about it. The trick is to keep your overall debt load manageable.

Lenders figure you’re carrying too much debt if your monthly housing costs, including mortgage payments, property taxes and heating, plus all your other monthly debt payments eat up more than 40 per cent of your gross monthly income. Housing costs alone are supposed to account for no more than 32 per cent of your gross monthly income.

Therefore if you are buying a home, which in most markets in Canada is still a good buy due to the market slowdown price corrections are inevitable, then consider a longer term amortization to start so that your payments are manageable as we navigate the next couple of years, and then with accelerated bi-weekly payments, and periodic principal payments you can take your amortization from 40 to 25 years and lower once we weather the inflation storm.

Interest rates on credit cards are just under 20 per cent in many cases, so pay off your card debt first. Then, get your line of credit down to a level where the payments combined with all your debts are manageable enough to give you some breathing room for higher rates and spending on things like gasoline and food.

With the income tax deadline coming up tomorrow, a lot of people are going to be receiving refund cheques in the weeks ahead. They could do a lot worse with the money but paying down consumer debt.  It is akin to boarding up the windows to prepare for a hurricane.  Not sure if it will hit or how hard, but I am preparing anyway.

What should your mortgage strategy be?  Take a deep discounted  variable rate mortgage for the balance of 2008, with an eye toward locking in to a fixed rate in early 2009, depending on how inflation and consequently Bank of Canada rates  are doing.

In a report from CIBC World markets Benjamin Tal, senior economist, sheds some light on where we are investing our money.  The results certainly show two distinct changes; one, we are moving from mutuals to bonds, which reflects our current aversion to risk, and the amount of cash is steadily increasing which even shows a higher level of risk aversion.

August 2007 net sales of Mutual Funds dropped by $1.69 Billion, in the same period net inflows to bonds increased by $800 million.

Money market funds (cash) has risen 35% year over year

Chequing and saving account are up 7% year over year

Conventional wisdom suggests that people will park their money in cash likely for the balance of this year and then in 2008 start moving to equities and commodities.

Found this on a Chinese news site but here is what was said:

Canada’s economy will grow by 2.2 percent this year, thanks to strong consumer spending, the Conference Board of Canada said Monday.

    The prediction stands in contrast with those offered by economists at the major banks, who argue that the slowdown in the U.S. economy will drag the Canadian economy to a slower pace. About 70 percent of Canada’s exports goes to the United States.

    Last week, Royal Bank economists said Canada’s GDP will rise by1.6 percent in 2008 as the trade sector slows and the U.S. economy weakens. In mid-March, TD Bank predicted economic growth this year would top out at 1.1 percent.

    But Ottawa-based Conference Board of Canada believes that steady consumer confidence, easing interest rates and a stable housing market should help keep Canadians spending, boosting the economy.

    It noted that spending by consumers grew by an annualized rate of 7.4 percent in the fourth quarter of last year. Canadians are expected to spend “liberally” this year as well, it said in a report.

    In 2007, Canada’s economy grew by 2.7 percent.

I like the banks prediction myself.  I think that the conference board may be too optimistic, especially in saying that consumer confidence is steadying, and also saying Canadians will spend liberally.  I live in the new “centre of the universe” in Calgary and I can tell you consumer confidence is down, and the housing market year over year is down 35%.  I can only imagine how consumers are feeling in other areas of the country.

Let’s add in if the US dollar drops significantly on the Canadian dollar this will have a very adverse effect on the Canadian economy, particularly in Ontario.  Canadians will surely spend liberally, those that can,  if this should happen but it will be on US goods priced in cheaper US dollars.

Stay tuned this story will continue to develop

In a report from CIBC World markets Benjamin Tal, senior economist, sheds some light on where we are investing our money.  The results certainly show two distinct changes; one, we are moving from mutuals to bonds, which reflects our current aversion to risk, and the amount of cash is steadily increasing which even shows a higher level of risk aversion.

August 2007 net sales of Mutual Funds dropped by $1.69 Billion, in the same period net inflows to bonds increased by $800 million.

Money market funds (cash) has risen 35% year over year

Chequing and saving account are up 7% year over year

Conventional wisdom suggests that people will park their money in cash likely for the balance of this year and then in 2008 start moving to equities and commodities.

Found this on a Chinese news site but here is what was said:

Canada’s economy will grow by 2.2 percent this year, thanks to strong consumer spending, the Conference Board of Canada said Monday.

    The prediction stands in contrast with those offered by economists at the major banks, who argue that the slowdown in the U.S. economy will drag the Canadian economy to a slower pace. About 70 percent of Canada’s exports goes to the United States.

    Last week, Royal Bank economists said Canada’s GDP will rise by1.6 percent in 2008 as the trade sector slows and the U.S. economy weakens. In mid-March, TD Bank predicted economic growth this year would top out at 1.1 percent.

    But Ottawa-based Conference Board of Canada believes that steady consumer confidence, easing interest rates and a stable housing market should help keep Canadians spending, boosting the economy.

    It noted that spending by consumers grew by an annualized rate of 7.4 percent in the fourth quarter of last year. Canadians are expected to spend “liberally” this year as well, it said in a report.

    In 2007, Canada’s economy grew by 2.7 percent.

I like the banks prediction myself.  I think that the conference board may be too optimistic, especially in saying that consumer confidence is steadying, and also saying Canadians will spend liberally.  I live in the new “centre of the universe” in Calgary and I can tell you consumer confidence is down, and the housing market year over year is down 35%.  I can only imagine how consumers are feeling in other areas of the country.

Let’s add in if the US dollar drops significantly on the Canadian dollar this will have a very adverse effect on the Canadian economy, particularly in Ontario.  Canadians will surely spend liberally, those that can,  if this should happen but it will be on US goods priced in cheaper US dollars.

Stay tuned this story will continue to develop