Evelyn Jacks: Managing risk is todayís smart play

Prospects for global growth have gotten a whole lot cloudier over the summer. The risks to our economic well-being seem to be increasing, not decreasing, as Europe struggles with recession, emerging markets such as China experience decelerating growth, and Canada's growth stalls at 2%. The time has come to think about how you are going to manage the accumulating risks ó and for many of us risk management means debt management.

Certainly, Canadians are between the metaphorical rock and a hard place. With 2% economic growth and 2% inflation ó the Bank of Canada notes in its July Monetary Policy Report (MPR)  it expects core inflation to sit around 2% for the next few years ó investors aren't likely get much in the way of returns that beat inflation.

And Canadians have been piling on the debt. The debt-to-income ratio of Canadians is at an all-time high of 153%, according to June 2012 reports from the Bank of Canada. Much of that debt is priced significantly higher than 2%, indicating growth in debt is likely to outpace growth in personal income.

Yet, a lot is riding on consumer spending. As the MPR notes, the Bank of Canada's 2%-inflation scenario is not without risk:

ï On the upside, the Bank says, higher global inflationary pressures, stronger Canadian exports and stronger momentum in Canadian household spending could push inflation higher.

ï On the downside, the European crisis, weaker global momentum and weakening growth in Canadian household spending could push inflation lower.

It all points to managing risk ó and managing debt.

Consider mortgages. It's not a bad idea to move upmarket to a better home if you can sell the old house at a tax-exempt profit and get a low-interest rate mortgage on the new place for a long period of time. But it is not such a good idea if you are carrying a variable-rate mortgage. According to the Canada Canadian Association of Accredited Mortgage Professionals, about 30% of Canadian mortgages are at variable rates. That means one-third of Canadians could very well face higher interest rates when they renew. That could boost debt and descimate savings plans.

Those who have used low-rate lines of credit or business loans to acquire appreciating assets are in the same boat. Although a low-interest rate environment can be the right time to acquire such assets, what happens to your balance sheet if rates head higher? Consider what would happen to your mortgage payments,loan payments and retirement savings plans if interest rates increased 2%. You need to manage that possibility when you take on big, long-term debt.

So, be sure to discuss the following questions with your financial advisor:

1. Should you lock in your variable-rate mortgage now, when interest rates are low?

2. Should you make paying down debt a priority?

3. Should you lock in savings at today's low interest rates at the expense of paying off debt?

It's Your Money. Your Life. If you have debt, it's prudent to anticipate your "Plan Bî should interest rates rise.