The exchange rate between the Canadian and American dollar is a daily fixture in the newspaper and on the nightly news. For many, a strong dollar is bad for business. A higher dollar means more expensive merchandise for our southern neighbours, which ultimately leads to decreased export revenue. But what does it mean for your personal finances? For many, very little.
However, while businesses battle currency strategies and dollar fluctuations, savvy investors can make the most of a rising Canadian dollar - if they understand the market. Whether you want to save a buck or turn a profit, here are five tips to keep in mind the next time the loonie hits par...
1) Check out U.S. stocks
Despite having a reputation for being boring and perhaps even out-dated, blue chip American stocks offer Canadian investors a wealth of opportunity when the dollar is on the rise. When the dollar is at par, you'll be buying American stocks dollar-for-dollar. If you're patient and the Canadian dollar goes over-par, as many financial experts expect will happen, you'll get a discount. Then, when the dollar ultimately drops back to a more reasonable rate, your investment will begin to grow. [More: Who needs gold? We're got canned ham! 10 kooky alternative currencies]
Of course, as with any stock, there are risks involved. Blue chip companies reside at the core of American business and boast a colourful history. Their name alone is derived from the game of poker where the highest and most valuable chip is — you got it — blue. With that being said, blue chip stocks share several important characteristics, including an established record of stable earning power over several decades. Most blue chip stocks also have a history of regular increases in the dividends payable for each share, and an equally long record of uninterrupted dividend payments to common stock holders.
Canadians can invest in blue chip stocks in a variety of different ways. For more information, contact a broker or ask a financial advisor about direct stock purchase plans and dividend reinvestment plans.
2) Get a U.S. credit card
One of the most common ways to take advantage of a strong dollar is to head across the border for major purchases. Unfortunately, if you use a Canadian credit card in the States, you'll typically encounter monumental fees and exchange rate differences. If you frequently travel to the U.S. or vacation there for an extended time every year, a U.S. credit card will allow you to avoid these fees and take full advantage of available savings. [More: 10 tips on buying US property ]
Obtaining a credit card in the U.S. can be tricky depending on the credit provider. As such, start with a department store credit card. These organizations offer less stringent requirements, especially in regards to your residency. Once you have established a credit history with this card, it will be easier for you to apply for a MasterCard or Visa account. Establishing credit in the U.S., as well as in Canada, can be a very smart investment, especially if you spend a lot of time traveling south of the border.
(A note of caution: If you are someone who already has several credit cards, all with balances, forget this option! Any savings will be depleted if you carry a balance.)
3) Stock up on American cash
This is a two-fold investment opportunity. When the dollar is strong, you can pack your piggy bank with Benjamins and not worry about exchange rates. When the dollar falls, those greenbacks will be worth more if you decide to convert them back into Canadian cash. [More: Tips for buying a timeshare]
The other option is to stash American cash for a rainy day. This way you'll have it when you decide to travel. When it comes to a universal currency, the U.S. dollar is accepted around the world making it a necessity for globetrotters.
4) Open a U.S. bank account
The benefits of opening a U.S.-denominated account in Canada can be wide spanning, especially if you've already completed the previous two tips (in some cases, it is necessary to have an established credit history prior to opening an account). Once established, your U.S-denominated account will not only help you eliminate currency exchange service fees, but it will also help your U.S. investments grow thanks to varying interest rates paid on savings.
If you do business in the States or travel south regularly, another option is to open an account at a U.S. Bank. It's a common misconception that you can't have an American bank account unless you have an American address. The reality is all you need are two pieces of identification and to show up in person. The bank will also need some general information about your finances, like your employer, your phone number, and your Canadian mailing address. You'll also need to provide proof of citizenship by showing your passport and you may be required to register for an Individual Identification Number by mailing Form W-7 to the IRS. [More: Safe haven investing: Is any investment a sure thing anymore?]
Benefits of opening an account in the U.S. include saving on exchange rates, the ability to easily reinvest stock dividends through the account, and the ability to establish a credit history in the States without a U.S. social security number (the American equivalent to our social insurance number).
A U.S.-domiciled account is likely taking things a bit far, however, for the average once-or-twice-a-year U.S. vacationer. These types of accounts are best suited to property owners or business owners who need to pay U.S. bills and taxes. It's also important to note that any interest earned on money held in a U.S. bank is considered U.S. income and thus requires reporting to the Internal Revenue Service (read:time consuming and expensive accounting requirements).
5) Purchase American real estate
If you're willing to make a considerable investment, real estate may be the way to go. The strong loonie, coupled with the States' crippled housing market can create favourable conditions for a property investment plan.
If you're interested in purchasing American property, get serious about the process and talk with a financial advisor familiar with U.S. real estate, as well as a knowledgeable realtor. There are many variables that could go wrong due to details specific to the location and local culture. For example, high vacancy rates, high crime or a lousy local economy could make it difficult to rent out an investment property.
And let's not forget about the taxman. Taxes, including those levied on capital gains earned at the time of sale, need to be factored in and carefully considered. Finally, title problems are extremely common in sales to foreign buyers, so make sure you do your due diligence. Improper title registration could result in a mountain of legal fees and a long, drawn-out court battle.
Strong dollar, smart money management
As with any investing decision, attempts to profit from Canada's strong currency require research, due diligence and professional advice.
But it is intriguing to know that a strong Canadian dollar doesn't just mean cheap south-of-the-border shopping and affordable weekend getaways (as exciting as those possibilities admittedly are). Take it a little further and you might just find that those nightly currency updates take on a decidedly personal spin.
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Nothing should be construed as an offer to sell, or a solicitation of an offer to buy a security, a recommendation for any product or service by Golden Girl Finance or any associated third party, or a suggestion regarding the purchase, holding or sale of securities. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.