34 – What Is Inflation and How Will It Affect Me

Wayne  0:04  

Welcome to the Debt Matters podcast where we help Canadians find solutions to their debts with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay and today we’re going to be talking about, What is inflation? And how does it affect you? 

My guest today, Daniel Maksymchak from LCTaylor, Licensed Insolvency Trustee in Winnipeg, Manitoba, and an office in Kenora. Ontario. Daniel, thanks for being here. 

Daniel Maksymchak

Happy to be here. Thanks for having me back.

Wayne

There’s a big discussion that is probably more relevant today than it’s been in 35 years, right?

Daniel Maksymchak  0:40  

Yes, close to that, for sure. It’s been almost that long since we’ve had inflation at these rates. 

Wayne  0:45  

And so when somebody’s asking, What does inflation mean? What is that? Can you explain it?

Daniel Maksymchak  0:51  

Well, inflation simply put, as simply as I can manage, it’s the devaluation of money, basically. So this is counterintuitive to people, because they’re thinking, Well, normally when you inflate something, it gets bigger. 

But in this case, it’s the cost of everything else that’s getting bigger, which makes the money in your pocket, or the money in your savings account worth less. And it just doesn’t go as far to buy as many items or services that you’re looking to purchase.

Wayne  1:16  

And this obviously has a major impact on people who are already struggling or who are living on budgets.

Daniel Maksymchak  1:26  

Absolutely, yes. It can have an impact in two ways really. It can have an impact directly as the cost of things go up, due to inflation, your money’s worth less, but you still have to buy the same amount of things to feed your family or run your business or that kind of thing. Your costs are going up but your money, in most cases, stays the same. There’s always a lag between when the price of everything else goes up and when you get a raise or when you see your own income rise. And your money’s just not going as far. 

So sometimes people have to turn to debt to fill the gap, which is when it becomes a real problem, because then you’re paying interest on that debt. And your money is going to go even less far, because you’re having to service the debt as well as purchase what you used to have to purchase. And it’s just a downward spiral from there. 

The second way that inflation indirectly impacts you is through what measures are taken to try to counter inflation. So inflation – the best way that they’ve found to try and fight inflation so far as to raise interest rates. And of course, to raise interest rates means that now you’re paying more for interest. And again, there’s less money that you have to purchase other goods and services. So not only is the cost of other things going up, but if you have debt, the cost of that debt is likely going to go up as well.

Wayne  2:43  

And I think a lot of Canadians are a little bit stressed if they own houses and are on variable mortgage rates – everything is going up, probably by the time we post this interview.  Things will have already jumped maybe once maybe even twice, which we haven’t seen a jump for quite a while.

Daniel Maksymchak  3:01  

Yes, that’s definitely true. As interest rates go up – if you’re on any kind of variable, floating interest rate, the amount of interest that you’re paying on your mortgage payments is going to go up. Your payment might not necessarily change immediately. But you’re going to be paying more of your payment going towards interest as opposed to the principal – which means that when it comes time to renew, there’s two negative factors impacting you. 

There’s the fact that you haven’t paid down as much as you ought to have at that point in your amortization of your mortgage. And the second thing is that, you’re going to be refinancing at a higher interest rate. 

So when you go to the bank and your five year term is over and they’re redoing the calculations, either you’re locking in at a fixed rate, which is going to be higher than it was when you initially took out that mortgage – or your variable rate is going to be higher. Because mortgage rates are presumably still higher, and that’s going to make your payment have to go up because you still have to pay down that mortgage in the prescribed period of time.

Wayne  4:00  

But the rates are still pretty good. They’re pretty reasonable, even if they go up a little bit.

Daniel Maksymchak  4:07  

By historical factors that’s correct. But you have to think about the portion of people’s household income that is going to service debt right now. Just by the sheer fact that people’s debts have never been higher. So every small quarter percentage point, which is usually the increments that they raise it in – every time it goes up by a quarter percentage point, when you have more debt, of course, that quarter percentage point is going to impact you more than it might have impacted you. 

You know, 25 or 30 years ago when inflation was last this high and real estate values were a lot less –  people were carrying a lot less debt, both in the forms of mortgage and consumer debt. So these quarter points, though they seem small, in terms of sheer dollars, can cause some real pain potentially,

Wayne  4:53  

Right and that’s a good point because let’s say 10 years ago, look at the cost of housing right across North America. In fact, it’s like nowhere is safe. With the rise of housing costs that have gone through the roof ever since COVID began, we’ve seen housing, even you hear in my area, has gone up probably 50%. It’s an incredible jump.

Daniel Maksymchak  5:20  

Absolutely and most of this has been financed by debt. If people want to get into the market, they’re mortgaging that. And whether it’s at a fixed rate now, or or a floating rate, when it comes time to renew – if the rates are higher, people are going to feel a significant pinch in their pocketbook.

Wayne  5:37  

Is there anything that you can do about this? Will they adjust when they increase that interest rate? Will that, do you think, maybe bring the housing bubble down? Is it a bubble? I don’t even know.

Daniel Maksymchak  5:52  

Well, I’d say I’m not qualified to talk about real estate bubbles and that kind of thing. But as you said, they’ve gone up by such a substantial rate in the last 10 to15 years. And, the speculation – a lot of that is fueled by lower interest rates. 

If you have X dollars per month you can spend on housing, and less of that is going to interest then you’re willing to pay more on principle, which drives up the price of the houses. So is the inverse going to be true? That’s what we’ll have to wait and find out when interest rates rise. 

That is going to limit the amount that people are able to qualify for a mortgage and finance in terms of real estate purchases. If people aren’t able to purchase at the higher prices – is that going to cause the prices to come down into a range where people can afford it based on current interest rates? Or are there enough people out there with enough savings or equity that they’ve built up that they can ride it out and aren’t forced to sell until things turn around? 

And then, if that’s the case, then part of this real estate spike in prices has been caused, we’ve been led to believe by short supply. So if less people are selling, there’s going to be even shorter supply. And maybe that’ll offset some of the higher interest rates and that factor in.

Wayne  7:07  

Yes, we’ll have to wait and we need a crystal ball. That’s for sure. When we talk about inflation, let’s say somebody is struggling with debt. And this is what this show is about. We’re here to help people who are having a tough time, when it comes to debt. You’re not alone. You mentioned that we’ve never carried higher debt than we have right now. Where is that debt? Is it in our homes? Is it in credit cards, consumer debt? What does that look like?

Daniel Maksymchak  7:34  

Generally speaking, it’s across the board. Obviously, with higher house prices, the mortgage debt is a higher component of that. But up until the start of the pandemic, when I believe it came down a bit as a result of some of the government programs – slightly. 

But consumer debt is also very high right now. So some of those things aren’t in fixed payments. A lot of people have lines of credit, either against their houses or unsecured lines of credit, with interest rates that float, and they’re just making the interest payments. So of course, if interest rates go up, then that’s going to increase that interest only portion of the payment, and they’re not paying it down. They’re just paying more in interest and getting less for the same for those payments.

Wayne  8:20  

Yes. So we talked about how it really affects us negatively, like the disadvantages. Is there any advantage to inflation?

Daniel Maksymchak  8:31  

If you’re a saver, I guess it would be good. If you have some savings in the bank, you’re going to start earning a higher rate of interest on that, then that would be advantageous to you. But at the same time, your cost of things are going to go up as well. So is it just going to offset? It depends on how much you have in savings. 

But In terms of us, as a Licensed Insolvency Trustee, dealing with people who usually have net negative wealth, then it’s a negative thing. They’re paying more in interest, the cost of the things that they’re buying is going up, and they don’t have any savings that they’re earning interest on to partially offset that. So it’s going to cause issues when people are having to take on debt, when they’re already highly leveraged, and they’ll have to take on debt potentially to make ends meet, due to the rising cost of goods.

Wayne  9:18  

Is there any advice you have for people who are in that situation?

Daniel Maksymchak  9:23  

Well, you’ve got to really look at your debt with interest rates going up. Every dollar of debt that you have is going to become more and more important and more and more of a burden, potentially. So you really have to look at your debt and say, Is there anything I can do to pay this off faster? Can I look at my budget? Is there anywhere I can cut back to free up more monthly cash flow to pay down my debt faster, so that the impact of this interest rate increase is reduced? 

Or, this debt that I have to the various different creditors at various different interest rates – is there any debt that I can take out to consolidate this debt? Basically I take out one loan that I can use to pay off multiple debts and hopefully this one loan that you have is at a lower interest rate. So not only are you simplifying things by only having one payment to this new debt that paid off the rest of the debts, but you also hopefully have a lower interest rate. So the payments that you are making on it are going to pay down that debt faster. 

If those things aren’t there, you’ve looked at your budget, there’s nowhere to cut, no one will qualify you for a consolidation loan, and you’re still not able to make ends meet –  then I would certainly talk to a Licensed Insolvency Trustee as soon as possible. You can get a sense of what your options are, and figure out what you can do to eliminate this debt so that you’re not paying the high interest rates on this debt and throwing good money after bad essentially,

Wayne  10:42  

It’s crazy to me that the people who need the most help get charged the highest interest rates, and the ones who hardly need help – they’re taking money for other investments. But because they got a great line of credit, they get this wonderful rate.

Daniel Maksymchak  11:06  

It’s not helpful for those people who need it. Banks love to lend money to people who don’t need it because they are confident they’re going to get it back. Whereas the people who do need it – they need it because they’re having a tough time making ends meet. And that’s riskier to the bank. 

If these people aren’t adjusting their spending habits, then this debt is just potentially growing. And, this consolidation loan that they’re getting isn’t really solving the problem. Then when you think about some of these consolidation loans that people have to get from kind of second tier lenders, not big banks, the interest rates on those can be so high that they’re doing more harm than good.

Wayne  11:46  

Let’s touch on that. We’ve done shows on that before. And when you say that all of a sudden, it just makes the hair on the back of my neck stand up in fear that somebody would do this. And we hate to slag off another company but there’s a lot of them out there –  that once you sign on that dotted line for that loan, it can really take things sideways quickly.

Daniel Maksymchak  12:09  

Again, yea. And unfortunately, that’s part of the problem of the whole stigma of insolvency and Bankruptcy. People are desperate to avoid it. Some of that might flow over the border from the United States and media there, where Bankruptcy is a very different process. But people here do have a fear of Bankruptcy, of course, it is your last resort. It’s not something you want to do unless you absolutely need it. But going out and seeking out these loans that are only potentially going to exacerbate the problem, aren’t the answer. You should definitely talk to a Licensed Insolvency Trustee first to find out what your options are, and then make an informed decision before going into any commitment like that.

Wayne  12:47  

We need to mention – maybe you can explain. Licensed Insolvency Trustees – this is all kind of run by the government and regulated by the government.

Daniel Maksymchak  12:57  

Yes, that’s exactly right. So myself, as a Licensed Insolvency Trustee, I hold a license issued by the federal government to administer Bankruptcies and Consumer Proposals and other insolvency filings. And it’s highly regulated. 

All the funds are held in trust and distributed under accordance with the law in the Bankruptcy and Insolvency Act. Our accounts are audited, of course, by the Office of the Superintendent of Bankruptcy, which is a division of the federal government. And it’s highly, highly regulated. 

Wayne  13:24  

I think this is really what people need to understand. And if you want to make that call, it’s a free consultation, the first one is a free consultation. Many times they can just point out some ideas on what you can do and what some of your options are. I think people have this fear that as soon as they call you, that all that means is he’s going to put me in Bankruptcy. And that’s far from the truth.

Daniel Maksymchak  13:50  

Absolutely, yes. So the first consultation is free, as you said. We’re not allowed to charge for the first consultation. So any Licensed Insolvency Trustee –  that’s someone you want to talk to, as opposed to a debt consultant or someone like that, who will very early on in the process, ask to receive money when they haven’t really done anything for you yet. 

So you definitely want to watch out for that and call a Licensed Insolvency Trustee who does the free consultation. We go through your situation and give different ideas unique to your situation. Then from there, you decide what you want to do. 

If you want to enter into a Consumer Proposal you could offer that to your creditors. Or if that doesn’t fit, Bankruptcy could be your best option in some cases. If you know your situation isn’t in that kind of position where those are your best options, then we’d suggest doing something like approaching your bank or credit union for a consolidation loan, or if you have equity in your house. Perhaps you could borrow against it to pay off your unsecured debts and get that interest rate down. Some of those things that I talked about earlier or it can be something as simple as looking at your budget and suggesting some changes that might make things more viable.

Wayne  15:00  

I can always find money in the budget – ridiculous amounts of $15, little monthly payments I have.

Daniel Maksymchak  15:09  

They add up, right? They add up. Do you have a subscription to this? Or do you buy a coffee daily or something like that? A lot of people come in, and they don’t understand where their money’s going. And it’s such an eye opening experience to fill out a budget and figure out wow, you know, I spend that at restaurant lunches, when I’m at work or something like that. And maybe if I brought a bag lunch, for a period of time, I could really tackle my debt. And it makes some difference. But until you know where your money’s going, you don’t know how you can make changes to really help out your finances. 

Wayne  15:43  

And it doesn’t have to be comfortable. It’s okay for you to be in a little bit discomfort, to have some discomfort when it comes to these choices. We cut back to one car, and sometimes it’s a pain, sometimes we’re not happy with it. But we just made the choice that having two vehicles is a ridiculous expense. And when we mathematically did it, we said no, let’s just hold off. And it was a great decision.

Daniel Maksymchak  16:07  

Absolutely. It’s things like that, that you think are essential. But then if you think about it a bit further, if I just had a bit of an inconvenience, I could save myself a pile of money. And then what could I do with that money later, especially if you’re paying interest on debts, then that money becomes more valuable, right? 

If someone has debts, basically, every dollar they spend is being financed. Because the opportunity cost of not putting that dollar on your debt is 10%, or whatever your average rate of interest is. So whatever you buy, you’re essentially financing a 10% rate. So you have to take that into account when evaluating your spending as well.

Wayne  16:42  

Yeah, we’re going to do another show on that topic. The whole Buy Now – Pay Later, that so many people are getting into. We’re going to give you some strategies on dealing with that. Final words of advice regarding inflation?

Daniel Maksymchak  16:56  

Look at your debt. You have to look at your debt with inflation and rising interest rates. Debt is going to become more of a problem than it has been in recent years. Look at your debt, talk to a Licensed Insolvency Trustee and find out your options and go from there.

Wayne  17:10  

Terrific. This was great. I really appreciate you being on the show. Nice to speak to you again.

My guest today Daniel Maksymchak from LCTaylor, Licensed Insolvency Trustee in Winnipeg, Manitoba and offices in Kenora, Ontario. To schedule that free consultation you can head over to lctaylor.com. 

And that is it for another edition of the Debt Matters podcast. You can subscribe wherever you get your favorite podcasts from and of course, for more information, they can always check out debtmatters.ca Thanks very much for listening.