Are low interest rates making you poorer?
Despite the temptation to jump right in, those record low interest rates may be making you poorer.
Canadian households will have a tough time growing their net worth given high household debt, according to a recent report from TD Economics.
Although household borrowing has slowed significantly over the last several months, household credit is still growing faster than income and asset growth, which leaves the household balance sheet “highly leveraged when compared to historical experience.”
Moreover, the level of debt has become a constraint to net worth growth. Net worth is now growing more than three percentage points slower than the average annual rate of 9.7% recorded in the 2004-2007 period, TD says.
But is debt always a drag on net worth?
Not necessarily. It depends on what you do with it. If you used the money you borrowed to eat out at your favourite restaurant a few extra times a month, the impact on your net worth would clearly be negative.
But, if you buy a reliable used car that helps you get to a job that pays $10,000 more per year than you currently earn, the impact on your net worth is actually going to positive.
The key is that you evaluate how any new debt will impact your net worth over time before you take out the loan, warns Creditsesame, a service that helps people manage their finances and consolidate their loans.
When reaching for plastic, be sure to keep these simple rules in mind:
- Only investments can be financed and have a positive impact on net worth
- Never finance any item that is consumed immediately (e.g. dinner, vacations, etc.)
- Durable consumer purchases (e.g. TVs, cars, iPads, etc.) can never improve your net worth because they depreciate
- Always factor finance costs into the cost of a financed consumer purchase
- Debt used to finance consumer purchase should be repaid before you stop enjoying the benefit
Do you consider the interest rate cost before buying on credit? Have lower posted rates tempted you to buy something you might otherwise have skipped?
By Gordon Powers, MSN Money
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