It's Your Money  

Explaining the impact of rising the U.S. debt ceiling

Impact of debt ceiling deal

The approval of the debt ceiling increase in the U.S. has been capturing headlines over the past few weeks, and as I write this (on Friday June 2) we just heard that the vote has gone through the U.S. Senate and President Joe Biden will sign the increase into law later tonight or tomorrow morning.

So, by the time you read this column on Monday, this should all be behind us (yet again). While this may have been front page news recently, it’s important to understand this is the 78th time the ceiling has been “raised” since 1962.

In the simplest terms, raising the debt ceiling provides the U.S. federal government with the ability to borrow more money to meet its financial obligations. When the debt ceiling is reached, the government cannot borrow any more money unless it is increased by an act of Congress. Failure to raise the debt ceiling can lead to severe consequences, including defaulting on debt payments, which could trigger and economic crisis.

But what does all of this mean for you?

This decision can potentially hold far-reaching implications for both average consumers and investors, as it affects various aspects of the economy. In this week’s column, I will explore what the approval of the debt ceiling raise means for the average consumer and investor:

The impact on average consumers includes:

Interest rates—The approval of the debt ceiling increase may lead to rising interest rates. When the government borrows more money, it increases the demand for credit, which can push interest rates higher. Consequently, consumers may experience increased borrowing costs for mortgages, auto loans, and credit cards, impacting their ability to make major purchases and manage their debts effectively.

Inflation—The decision to raise the debt ceiling can have implications for inflation. The government's increased borrowing puts additional pressure on the money supply, potentially leading to an increase in prices. As prices rise, the purchasing power of consumers decreases, making goods and services more expensive. Consumers may find their budgets (even further) stretched as they face higher costs for everyday necessities.

Consumer confidence—Uncertainty surrounding the debt ceiling can dampen consumer confidence. If consumers fear that the government's financial stability is at risk, they may become hesitant to spend, save, or invest. This reduced consumer confidence can have a negative impact on the overall economy, affecting businesses and job growth.

The impact on investors includes:

Stock Market Volatility—The approval of the debt ceiling rising can result in increased volatility in the stock market. Investors dislike uncertainty, and the debt ceiling debate can create anxiety and lead to fluctuations in stock prices. Investors may need to re-evaluate their investment strategies to navigate the potential market turbulence.

Bond Market Performance—The bond market, particularly U.S. Treasury bonds, can be directly affected by the debt ceiling. If the debt ceiling is not raised promptly, it could increase the risk of default on government debt. This risk may cause bond prices to decline and yields to rise, affecting fixed-income investors who rely on bonds for stable returns.

International investor confidence—The debt ceiling debate can impact the perception of the United States' creditworthiness among international investors. Failure to raise the debt ceiling in a timely manner could undermine confidence in the U.S. economy and its ability to meet its obligations. This could result in a decrease in foreign investment and a weakening of the U.S. dollar's value against other currencies.

The approval of the debt ceiling increase may seem like an averted crisis and the stock market returns on Friday would point to exactly that. But it’s important to be aware of the lingering issues that brought us to this point and the potential impacts this raise can have on things like inflation and interest rates.

As always, the best defense for market and economic turmoil is a well laid out and regularly updated financial plan with a well-diversified portfolio.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Retirement planning for the self-employed

Retirement planning tips

Retirement planning is crucial for everyone, regardless of their employment status. But for self-employed individuals, the responsibility of planning for retirement is even more critical.

Without the benefit of an employer-sponsored pension plan, self-employed Canadians must take proactive steps to ensure a secure and comfortable retirement. Here are 10 tips that can help those that are self-employed reach their retirement goals:

Start early: One of the most important tips is to start retirement planning as early as possible. Time is a powerful ally when it comes to building wealth for retirement. By starting early, you can benefit from the compounding effect of investments over the long term, maximizing your savings potential.

Create a retirement budget: Developing a retirement budget is essential for estimating your future income needs and determining how much you need to save. Consider your desired lifestyle, expected healthcare expenses, and any potential financial obligations. This budget will act as a roadmap for your savings goals.

Set up a dedicated retirement account: Establish a separate retirement account to segregate your retirement savings from your day-to-day business expenses. Options such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) are often excellent choices for self-employed individuals but there are many other options as well.

Maximize contributions: Take full advantage of the contribution limits allowed in your retirement account. The more you contribute, the more tax advantages and growth potential you can enjoy. Keep track of your allowable contribution room and aim to maximize it each year.

Consider a spousal RRSP: If you have a spouse who earns a lower income or does not have a pension plan, consider contributing to a spousal RRSP. This strategy allows you to income-split during retirement, reducing your overall tax burden and optimizing your retirement income.

Diversify your investments: When planning for retirement, it's crucial to diversify your investment portfolio. Consider a mix of low-risk and high-risk investments to balance potential returns with stability. Diversifying some of your assets outside of your business (and industry) is often overlooked by those that are self-employed.

Stay Informed about tax strategies: As a self-employed individual, understanding the tax implications of your retirement savings is essential. Familiarize yourself with tax strategies such as income splitting, capital gains exemptions, and utilizing tax credits. Stay updated on any changes to tax laws that may impact your retirement planning.

Maintain an emergency fund: Building and maintaining an emergency fund is crucial for everyone but even more so for self-employed individuals. Having a financial safety net allows you to handle unexpected expenses or business downturns without tapping into your retirement savings prematurely.

Consider insurance coverage: Explore insurance options that provide coverage for health, long-term care, and disability. Adequate insurance protection can safeguard your retirement savings in case of unforeseen circumstances or medical expenses.

Regularly review and adjust your plan: Retirement planning is not a one-time task. It's essential to review your retirement plan regularly, especially if you experience changes in your income, expenses, or goals. Consider seeking professional advice from a qualified financial planner who can help you make adjustments and keep your retirement plan on track.

Retirement planning is a critical responsibility for self-employed Canadians. By following these top tips you can build a solid foundation for a financially secure retirement. Remember, seeking professional advice from financial experts can provide personalized guidance based on your unique circumstances.

With careful planning and disciplined savings, you can enjoy the retirement lifestyle you deserve. Start today and secure your future.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

The intricacies of socially responsible investing

Invest responsibly

In recent years, Canadians have increasingly embraced the concept of socially responsible investing (SRI) as a means to align their investment decisions with their personal values.

SRI offers an opportunity to make a positive impact on society and the environment while still generating financial returns.

Socially responsible investing, also known as sustainable or ethical investing, refers to the practice of incorporating environmental, social, and governance (ESG) factors into investment decisions.

Instead of solely focusing on financial returns, SRI considers the broader impact of a company's activities on society, the environment, and corporate governance practices. This approach allows investors to support companies that are committed to sustainable practices and positive social outcomes.

When engaging in socially responsible investing, investors should consider a range of ESG factors. Environmental considerations encompass a company's impact on climate change, resource usage, pollution, and conservation efforts. Social factors may include labor practices, diversity and inclusion, community engagement, and consumer protection. Governance factors assess a company's leadership, executive compensation, board independence, and transparency. By evaluating these factors, investors can identify companies that align with their personal values and contribute to a more sustainable and equitable future.

Canadians have several options to participate in socially responsible investing.

One approach is to invest in companies with strong ESG practices and policies. These companies actively manage their environmental impact, embrace fair labor practices, promote diversity and inclusion, and prioritize good governance.

Investors can also choose funds that focus specifically on SRI, known as socially responsible funds or ESG funds. These funds typically incorporate rigorous screening criteria to ensure that investments align with established ESG principles.

A third avenue for socially responsible investing is impact investing. Impact investments are made with the intention of generating measurable positive social and environmental outcomes alongside financial returns. These investments are often targeted towards sectors such as renewable energy, affordable housing, clean technology, and healthcare. Impact investing enables Canadians to actively contribute to specific causes and directly support organizations working towards positive change.

Engaging in socially responsible investing can yield numerous benefits. First and foremost, it allows individuals to align their investments with their values and contribute to issues they care about deeply. It can also provide long-term financial benefits as companies with strong ESG practices are more likely to be well-managed and resilient, potentially leading to sustainable returns. Additionally, by investing in sustainable solutions, Canadians can help drive positive change and encourage companies to adopt responsible practices, creating a ripple effect in the investment landscape.

While SRI offers many advantages, it's important to acknowledge the challenges and considerations involved. One challenge is the lack of standardized ESG metrics and reporting, making it difficult for investors to assess and compare companies accurately. However, various organizations are working towards developing consistent frameworks and standards, such as the Global Reporting Initiative and the Sustainability Accounting Standards Board, to address this issue.

It's also crucial to thoroughly research and understand the investment options available to them. Not all SRI funds are created equal, and investors should review the fund's screening criteria, performance track record, and management team to ensure alignment with their values and financial goals. Consulting with a financial advisor who properly understands SRI can provide valuable guidance and support.

Socially responsible investing can empower investors to make a positive impact on society and the environment through their investment decisions. But the most important factor when selecting investment options is still ensuring that they are appropriate for you and your situation.

Don’t let its principles take priority over your own investment needs and goals.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Protection against the rising cost of long term care

Long term care insurance

As inflation rates continue to increase, individuals are becoming more and more concerned about the rising costs of everyday life. But one rising cost that isn’t being discussed enough is the increased expenses people may face for their long-term care.

According to a 2021 report by the Canadian Institute of Actuaries, the average annual cost of a semi-private room in a Canadian nursing home is over $80,000, which represents a significant increase from just a few years ago.

The report also noted that the cost of in-home care has also been increasing, with the average hourly rate for a home health aide in Canada now around $30 per hour.

The rising cost of long-term care is a significant concern for many Canadians, particularly those who are nearing retirement age. As individuals age, their risk of needing long-term care increases, and with the rising costs associated with this care, many individuals are finding it difficult to afford without depleting their life savings.

Long-term care insurance (LTCI) is not overly popular in Canada but with inflation climbing dramatically, now is the time to give it a second look. LTCI is an important financial tool for those who want to protect themselves from the high costs associated with long-term care.

LTCI provides coverage for a wide range of services and supports for individuals who need assistance with activities of daily living, such as bathing, dressing, and eating. These services can be provided in a variety of settings, including nursing homes, assisted living facilities, and in-home care.

One of the challenges facing Canadians who are considering LTCI is the impact of inflation on their coverage. Traditional long-term care insurance policies provide coverage for a fixed amount of money, which may not be sufficient to cover the rising costs of long-term care due to inflation. As a result, many individuals are finding that their coverage is not keeping pace with the actual cost of care.

To address this issue, individuals should consider purchasing long-term care insurance policies that offer inflation protection. These policies provide coverage that increases over time to keep pace with the rising costs of long-term care. There are several types of inflation protection available, including:

• Simple inflation protection: This type of policy provides coverage that increases by a fixed percentage each year. For example, a policy with three per cent simple inflation protection would provide coverage that increases by three per cent of the base amount each year regardless of what inflation is actually doing.

• Compound inflation protection: This type of policy provides coverage that increases by a percentage that is based on the previous year's coverage. For example, a policy with three per cent compound inflation protection would provide coverage that increases by 3% of the previous year's coverage and not the initial amount.

• Consumer price index (CPI) protection: This type of policy provides coverage that increases based on changes in the consumer price index. This is a measure of the average price of goods and services purchased by consumers.

In addition to considering policies with inflation protection, individuals should also be aware of the potential risks associated with traditional long-term care insurance policies. These policies may have strict underwriting requirements, which can make them difficult to obtain for individuals with pre-existing conditions. Additionally, some policies may have high premiums, which may be unaffordable for some individuals.

One alternative to traditional long-term care insurance policies is a hybrid policy that combines long-term care insurance with life insurance or an annuity. These types of policies provide a death benefit if long-term care is not needed, while also providing coverage for long-term care if it is needed. Hybrid policies may be a good option for individuals who are concerned about the risks associated with traditional long-term care insurance policies.

The rising cost of long-term care in Canada is (or should be) a significant concern for many individuals. As inflation rates continue to increase, it is important to reconsider the type of long-term care insurance coverage that is needed.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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