Interest rates and inflation: How to manage your money as costs soar

Published November 1, 2022.

Estimated reading time: 3 minutes

In summary:

  • Many Canadians are experiencing added financial pressures due to record inflation and rising interest rates.
  • The Bank of Canada sets the country’s prime interest rate to borrow money from all Canadian banks and even a charitable organization like Windmill Microlending.
  • Keeping close track of your monthly budget, changing interest rates and prioritizing contributions to your savings and emergency fund can put you in a good position to navigate rising costs.

Financially speaking, it’s an interesting time to be an immigrant to Canada.

Recent immigrants, in particular, have shown historically strong income growth and their earnings often match those of Canadians not long after arriving.

However, like many Canadians, you may be experiencing added financial pressures due to higher costs for things like food, gas and housing. Record inflation and rising interest rates have made budgeting and financial planning more complicated for new Canadians and Canadian-born individuals and families, alike.

Windmill Microlending Client Success Coach Joyce Wan works, daily, with immigrants and refugees, supporting them in their financial and career planning, says some newcomers are having difficulty managing their money as costs rise and are confused about the changing economic conditions in Canada.

Windmill Microlending Client Success Coach Joyce Wan says understanding the reasons for inflation and higher interest rates in Canada can help newcomers better manage their money.

“I often discuss inflation and rising interest rates with our Windmill clients. For those new to Canada, this can help clear up confusion,” says Wan.

Why is Canada experiencing increased inflation and higher interest rates?

Wan explains that as businesses have gone “back to normal” in the wake of the COVID-19 pandemic, there has been increased demand for goods but also disruptions in the supply chain, either in manufacturing or transporting those goods to consumers or businesses. Other issues affecting the global supply chain? Major conflicts like the war in Ukraine.

According to Wan, these global supply chain issues impact consumer prices and cost of living.

Looking for apps and resources to help you manage your budget and finances? Read our recent blog post.

At the same time, the Bank of Canada sets the country’s prime interest rate to borrow money from all Canadian banks and financial institutions. This even affects the interest rate a charitable organization like Windmill Microlending can offer on its low-interest loans. The Bank of Canada has raised interest rates as a way to slow down the increasing cost of living. For many Canadians, higher interest rates can increase monthly debt repayments on variable-rate mortgages, lines of credit, credit cards and other types of loans, including microloans.

“You especially notice these changes when you buy groceries, gas, clothes, medicine, other household items but also when you pay rent, make a mortgage payment, or carry debt on a credit card with high interest,” says Wan.

Adds Wan, “For Windmill Microlending clients who use our low-interest loans to pay for the costs of accreditation, training, certifications or professional development courses, increasing interest rates can be a surprise. However, they are manageable if you understand the increase only amounts to a few dollars per month.”

For example, for a microloan of $15,000, an interest rate increase of 0.75% can amount to a monthly payment increase of $5.

Wan offers the following money management tips to help immigrants and refugees gain better control of their finances during this period of rising costs.

Tip #1: Understand your monthly budget

If you don’t already keep track, start monitoring your monthly budget. It can be a simple but helpful tool to understand all your sources of income and detailed expenses. Here’s an example of a free online budget planner tool to help you do this. If your expenses exceed your income, you can reduce non-essential spending, buy items when they are on sale, check for discount offers and seek ways to grow your income.

Tip #2: Keep track of your debts, including changing interest rates

Make a list of your current debts broken down this way: Types of debts, outstanding balances, monthly repayments, current interest rates and duration(s) it will take you to pay the debt(s) in full. Focus on paying off the debt(s) with the highest interest rate(s), even if payments start small. Monitor how Canada’s prime interest rate is changing here. When that rate changes, your interest rate on a variable loan or mortgage will change, too.

If possible, avoid stretching your capacity to borrow for things you want but do not need. Consider your purpose for borrowing. Will this debt ultimately help you achieve a short or long-term goal? The decision to borrow funds or take on a loan will depend on your personal and financial situation, financial knowledge level and credit history in Canada.

LISTEN: Windmill Client Success Coach Joyce Wan highlights the benefits of using budget tracking tools to keep tabs on your expenses.



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Tip #3: Focus on your savings and emergency fund

Identify your savings goals, whether that includes owning a home, buying a car or saving for a professional development course to help grow your career. Use a tool like a financial goal calculator to capture your financial goals and project how long it will take you to reach those goals. As well, make sure to capture all your savings sources and track your progress including monthly balance(s) and monthly contribution(s). Understand how quickly you can access these funds if needed and any penalties for withdrawing funds from certain accounts.

Finally, set up an emergency fund that is essentially unusable except for circumstances like loss of job, emergency travel or urgent repair needed to your home. Ideally, this emergency fund can cover 3-6 months of your household expenses, but any amount is a good start.

Could a low-interest loan help you pay for the costs of accreditation, training, certification or career development in Canada? Find out if you are eligible for a Windmill microloan of up to $15,000 by completing our two-minute loan eligibility quiz.


Categorized in: Development, Career Success and Planning, Financial Planning,