BY JIM PITT
Special to the VOICE
Saving money today is not really encouraged. It used to be common for governments and financial institutions to admonish people if they weren’t actively saving for emergencies, big-ticket items and retirement. Everyone was saving, not that long ago.
In the 1980s, with the advent of globalization and the digital age, it became clear that saving was not going to keep our economy growing. Spending on consumer goods and new services was, and is, the key to our consumption-based economy. The answer was simple and it changed the way people consume. Real wages have been flat for decades, yet to encourage spending, a solution was required: Credit. If we can’t give people a real raise then let’s give them credit. Credit in the form of credit cards, home equity loans, enormous mortgages, student loans, long term car loans and lines of credit. The result is that Canadians now owe $1.70 for every dollar they make. So how does a person save in an economy that discourages saving? It’s not as difficult as it seems, but it requires looking at your money differently.
Saving used to be a matter of putting extra change into a money jar or forcing yourself to leave money in a bank. Change in your pocket had real value then and banked money was harder to get at prior to the digital age, so this was also effective. Access to money today is quick and relatively painless. In 1989 I read “The Wealthy Barber,” by David Chilton. In offered advice for living a financially sound life. The key takeaway was to pay yourself first. Designate a portion of your pay, say 10 to 15%, and have it automatically diverted to a special account and don’t touch it. That money will soon be considered a part of your monthly spending and you won’t miss it. At this point you might be saying, where will I find 10 to 15%?
Change the way you look at your money. There are endless temptations in this brave new world. Identify them and remove them, one by one, just like you do with all the foods you like, but you realize they’re making you overweight. If you like to buy clothes or lattes on a whim, avoid stores, websites and cafes that cater to these whims.
Banks are a business with one goal: to make money for their shareholders. Shop for banks or credit unions with the lowest fees. Don’t use ATMs unless they are your bank’s, otherwise you pay fees for the convenience.
Credit cards are designed to encourage overspending, even if you pay off the balance every month. The interest rates they charge are very high. Why? Because it’s their money being lent out and they want it back. Contrary to the advertising campaigns that abound, you can’t have everything. Identify your means and live within them. Save more when times are good. Use this extra money as a windfall, but don’t spend it on a temptation. Learn to identify the marketing terms designed to separate you from your money and the main areas of overspending.
There are hundreds of words and phrases used to tempt you. They change over time, but a few remain constant because they work so well. “Treat yourself,” “You’re worth it,” “You only live once,” are bandied about everywhere. Other words are also powerful means of separating you from your money: new, save, safe, proven, love, discover, guarantee, health, results, you. These words are commonly used in ads to entice, to make you feel unique and special. The use of these words and phrases has caused us to spend too much on cell phones and plans, credit card interest, cars, restaurant meals, weddings, clothes, work-out-related items, extra warranties and insurance to name a few. Each of these areas of overspending have an impact on your ability to save.
Now that I’ve convinced you, you’re wondering where to put all of this new-found wealth.
There are many places to put money, but most of them are not very wise. Inflation is running at 2% this year and to make your money make money, you need to be brave. Putting your money under a mattress or in a safety deposit box pays you nothing. Placing it into the welcoming hands of a bank offering a minuscule rate on a savings or checking account isn’t much better. A high interest savings account pays at best 1.7%, but the institution hasn’t got a name you’ve ever seen. A G.I.C. locks your money up for a year or longer. A 2-year might get you 2%. BMO has a 6-year at 1.5%. Imagine that. An RSP is a good starting place, but a TFSA is better for most. The Registered Retirement Savings plan is designed to give you a tax break up front and tax you when you take it out. A TFSA is designed to allow already taxed money to grow within the account, tax-free. Both of these savings products are useful, depending on how they are used.
An RRSP was all there was until 2009. Many people saved diligently and placed their trust in financial people who sold them mutual funds, because that’s all there was. Times have changed and mutual funds are quickly being replaced with ETFs, or, Electronically Traded Funds. These funds are similar to mutual funds, but they don’t cost as much to own. You keep more of your money. A mutual fund can charge over 2% for a management fee. An ETF can cost as little as 0.30% because there is no investment team to pay. It’s all done electronically, just like everything else these days. The badly named TFSA—it should be called TFA or TFIA, for Investment Account—is not a savings account. It could be your retirement account if you start investing young. A couple today could have $104,000 earning tax-free income. At the present $5,500 per person over 18, per year, we are looking at some serious accumulation over a lifetime. The contribution amount will also increase over time. You can invest in anything an RSP is in. Yet 80% of account holders leave it in a savings account. What a waste. Any money made inside a TFSA is not taxed when taken out. It is not included in your other income. It is in effect, invisible to the taxman.
There are some rules to follow. This account is recorded and monitored because the CRA wants to keep an eye on it. Don’t day-trade to make a fortune. You will be scrutinized by CRA. Don’t take money out for anything. This is your retirement. But if you must, don’t put any money back in until the following year or you will have over- contributed in that calendar year and will pay a penalty to CRA. Invest it in a balanced, diversified portfolio of stocks and bonds. This is where you must be brave. If you invested at the rate of $100 per week at an annualized return of 5% for 30 years, you could accumulate $600,000 each. Try to save as much as you can, but the room in the TFSA accumulates so you can catch up as you earn more. To keep ahead of inflation, the usual savings products just don’t cut it anymore. Finding a balanced, diversified portfolio isn’t easy, especially in Niagara, but my advice here is to start looking. Try Toronto.
I realize that if you all took this sage advice the economy, as we know it, would collapse. Consumer spending would dry up and, well, it would be a catastrophe. Personally, I’m not worried about that happening any time soon, so don’t you worry either. But if you really want to save for the future and gain a large degree of independence, then here’s where you can start. Studies have shown that just realizing that you will retire one day and will need an income is enough to get you on the road to financial independence.