David O’Leary, CFA
Charterholder and WealthRocket’s Personal Finance Expert.
There aren’t a whole lot of bright spots when we look at projections for Canada’s economy. Growth is slowing. The overnight interest rate is sitting firm at 5%. And there’s little consensus about whether we’re barreling toward a recession or already in one.
While all of that sounds bleak, now is a great time to prioritize financial literacy. Arming yourself with three fundamental financial concepts can help you weather tough economic times ahead.
Understand how Canada’s credit system works
A rocky economy means more of us will rely on credit to get by. In fact, a recent Equifax study shows we already are, with credit card balances reaching an all-time high of $107.4 billion in this year’s second quarter.
Taking on credit card debt should be a last resort. But if you have to use credit, knowing how it works will benefit you greatly. Get a handle on how credit card interest accumulates, what impacts your credit score and how to monitor it, and in what life scenarios your score is checked. Understand the difference between hard vs. soft credit checks, and how interest rate changes impact your loans.
If you understand how credit works and use it responsibly, you can:
- Build credit, which will greatly improve your chances of being approved for loans, such as a mortgage
- Lessen the impact on your score by knowing when and when not to make a big purchase
- Score a lower interest rate in some cases
Harness the power of compound interest
According to a recent WealthRocket survey, 3-in-10 Canadians are investing less because of the last two years of economic uncertainty.
That uncertainty isn’t expected to lift anytime soon. So, if Canadians continue to invest less, they’re missing out on the power of compound interest, which can help them build wealth. After all, compound interest is what can turn $5,000 into $6,077.53 after four years, at an interest rate of 5% that compounds annually.
Investing through turbulent times may seem counterintuitive, but it’s actually a great strategy. Markets fall, but they always rebound.
Know the tax credits available to you
The economy might be hurting, but you still have to pay taxes. So, it’s only to your advantage to know all the possible credits, deductions, or rebates available that the government has granted in order to make your financial life easier.
That might include the Canada Child Benefit, the GST/HST credit, or charitable tax credits. It might also include tax breaks from registered investment accounts like your RRSP, TFSA, RESP, FHSA, or RDSP.
Maximizing these benefits and credits can reduce the amount of money you owe the government come tax time, which leaves you with more when things feel tight or income is precarious.
While Canada’s economic outlook may seem turbulent, take it as an opportunity to refine your financial literacy. Understanding credit, compound interest, and tax credits are three essential concepts that can help you navigate a shifting economic landscape. Think of it as armour in these uncertain times.
