Identify inefficient interest

Currently, there’s a lot of chatter about what may happen if interest rates rise. Chances are, you’re looking for tips on how to protect your funds and balance your portfolio.

Yet, capturing funds wasted on inefficient interest payments should always be a priority. When cash flow planning, that’s one of the main ways to save money.

By talking about the following issues with your advisor, you’ll better understand how paying more interest on debts affects your finances.

• Mortgage myopia. You may assume your interest rates and mortgage payments will remain the same over a long period of time, or you may not know how to plan for fluctuating rates. So, you may have failed to build interest-rate movement assumptions into any financial projections.
• Amortization risk. It’s easy to compare interest rates, so it’s easy to focus on doing only this when choosing mortgages and structuring your debts. But how long the loan is spread out, known as the amortization period, is also a key consideration. Amortization is one of the main variables you should consider since it impacts the total repayment cost of your debts.
• Lower rates aren’t always better. Paying 3% versus 4% interest may seem better, but there’s more to calculating the total cost of debts than comparing rates. Along with looking at amortization risks, review all your repayment options, as well as the total cost of debts over your lifetime.
• Other debts. It’s the total average rate that you pay over all debts that actually means something. Consider whether combining all debts into one account may be more cost-effective.

Through cash flow planning, you can pay down debt principals faster, as well as reduce exposure to fluctuating interest rates.

Stephanie Holmes-Winton is a Halifax-based financial services educator and speaker.