Gum? Really? Have we fallen so far that the only way to pull ourselves out of debt is to cut back on the tiniest, chewiest indulgences of life? Apparently. Lots of experts out there are lecturing the masses to cut back on frills. No gum, no Starbucks, no bon-bons.

But is eliminating these trifles the smartest way to balance your bank account? I hashed this question out with one of my more frugal friends, and she said no. It’s much better to cut back on one or two big expenses than nickel and dime your way into the black. For instance, she said, if you normally take two vacations a year, you’ll save thousands taking only one. And cutting out several trips to the mall can save you hundreds of dollars.

Her assessment sounded about right. Just to be sure, though, I pulled out my calculator. First up: gum. Say you’re a gum-aholic. Three packs a week at $1.50. Cut that out of your life and you’ll save just $234 a year.

Okay, how about buying coffee on the way to work. My wife and I used to buy Tim Hortons every day when we left the house. Three years ago we stopped. It saved us $650 a year.

But there are smarter ways to save even more. The average Canadian family spends nearly $2,200 a year eating out. Eliminate half the trips to the restaurant and you’ve saved over $1,000.

Of consider switching supermarkets. Earlier this year MoneySense magazine compared the cost of an average basket of groceries at Loblaws and No Frills, the discount store. No Frills cost $38.33 less. So over a year you can save nearly $2,000 if you shopped at No Frills.

My conclusion: Cutting out things like coffee shops and small indulgences makes you feel like you’re doing the right thing. But the impact is minimal. To really save money, you need to target larger expenditures. It could be your grocery bill or that extra vacation.

Agree? Disagree? Let me know what you think.

1. After the bust. Here’s what you really should have learned. The Lehman Brothers collapse a year ago set off the global financial meltdown. On its anniversary there’s been no shortage of experts summing up the lessons learned. I think these nine from the Canadian Capitalist blog are the most useful for the average Joe.

2. Pay off your mortgage or invest? Which should you do first?Like the chicken and egg argument, people can’t seem to agree. But this articlein the Globe and Mail makes a superb case for eliminating the house debt first.

3. Don’t listen to this kind of advice. Investment industry veteran David West has good advice on how to avoid bad advice when buying stocks this fall. Click here.

4. To paraphrase Jack Nicholson, “You CAN’T HANDLE the truth about stocks!” Except in this case the part of Jack Nicholson is played by Zvi Bodie, author of Worry-Free Investing. Check out this enjoyable Q&A here.

5. A zippy recovery after all? As the recession plods onward, many have concluded that what we’re in for is not a quick bounce-back, but a dreary, slow recovery. Yet history shows there’s room for optimism, says James Grant. Click here.

Yet there’s some good news for all of us when it comes to our wealth. Canadians are getting richer–albeit slowly. According to MoneySense’s most recent All-Canadian Wealth Test, the average household in this country is 7% richer in real terms than in 2000, during the height of the dot-com boom.

Oh sure, this recession has made a dent in our wallets. Canadians are 10% poorer than they were in 2007, which is the last time we did this study. You can read all about it in the October issue of MoneySense, on newsstands now. The article was written by Roger Sauvé, of People Patters Consulting. Roger is one of the foremost experts on family finances in Canada.

This year MoneySense found that the median net wealth of households is $170,000. That figure represents all your assets (including your home, pension, investments, RRSPs) minus all your debts (including mortgage, student loans, credit card debt).

Of course, wealth varies widely by age. Most of us have very little wealth to brag about in our 20s. We start to build it up in our 30s when we pay off our student debts, buy a house and start to invest. It continues to grow in our 40s, and by the time we reach our mid 50s and 60s, we’ve accumulated an impressive amount of money and assets. The median wealth for people 55 to 64 is $420,000.

If you want to figure out your own wealth and compare it to other Canadians just like you, go to MoneySense.ca. We’ve got two handy calculators that let you crunch the numbers in minutes. Who knows, you may actually be richer than you think.

1. You need a 100% gain to erase a 50% loss. If you’re like me, you missed the high school math class that taught this one. Or maybe they never did teach it. Either way, Jonathan Chevreau explains how making money in the market is a lot harder than losing it. Click here to read his article.

2. How to avoid the pitfalls of exchange traded funds. ETFs used to be fairly simple. But as more investors flock to them, the investment industry is making them more complex. This blog post explains what to look out for.

3. 11 ways to spice up your emergency fund. You do have an emergency fund, don’t you? How else are you going to pay for that leak in your roof or new transmission for your car? (Hint: Don’t say your credit card). Here are some good tips to build up an emergency fund.

4. Adding natural gas to your portfolio. Larry MacDonald is one of my favorite columnists. Here he looks at whether now is the time to fill up on gas.

5. How did economists get it so wrong? If you’re looking for a meaty read, try this piece by New York Times columnist (and Nobel economics prize winner) Paul Krugman. Many bloggers have already loudly disagreed with some of his points. But why not read the original first and decide for yourself.

“They don’t taste as good,” she said. “They’re pickles,” I replied. “They all taste the same.”

Up until now the Great Pickle Debate has gone unresolved in our household. But I think I’ve finally got the proof that I’m right. The October issue of Consumer Reports has a great article comparing store brands with their more expensive name brand counterparts. We all know store brands are cheaper:27% less on average. But most of us assume that store brands are inferior in taste and/or quality.

Not true, says Consumer Reports. The magazine taste-tested 29 categories of foods and found that in 19 the store brands and name brands were equally good. In four other categories the store brand won and in six the name brand won.

Fact is, name brand products don’t cost more because of better ingredients. It’s because name brand companies spend more on developing the product, designing the package and marketing it. Consumer Reports estimated an average family could save over $1,100 a year simply by substituting national brands with store brands.

Government bonds offer a particularly nasty example. Since investors have fled in droves to the safety of these bonds, they have become so overpriced that there is hardly any room left for further gains.

Nowadays, to make any money in bonds, you have to choose riskier propositions. Let me show you why by examining the range of fixed-income investments.

The safest end of the fixed-end spectrum has traditionally been money market funds. These funds hold safe short-term debt, such as treasury bills that mature within 90 days. They aim to deliver a steady stream of income that is better than a bank account but not as good as bonds.

Problem is, money market funds are delivering next to no return these days because central banks have cut short-term interest rates close to zero. Returns are so puny that many money market funds would be losing money if their sponsors deducted their usual management fees. These funds are still afloat only because sponsors have temporarily waived fees.

The story is not much better as you move along the fixed-income spectrum to short-term bond funds. The core holdings of these funds are three- to five-year bonds. The returns from those bonds range between 1% and 1.7%. Again, once you deduct fees and expenses, the amount of residual interest available to investors is negligible.

So how about diversified bond funds? These funds hold a broad mix of bonds with maturities ranging from one to 30 years. A typical mix of such bonds is currently producing a yield of 4% or so. But don’t forget that most actively managed bond funds charge a management fee of at least a percentage point. Therefore, you are left with a yield of only 3% or so.

A 3% yield is a paltry return on your investment — and to earn it, you have to be prepared to face another risk. It’s called inflation. Governments are spending massive amounts to stimulate the economy and bail out a broken financial system. Going forward, the fiscal burden of caring for retiring baby boomers will only add to the budget pressures on legislators. The simple, easy way for governments to finance all their obligations is for them to print money and encourage an outburst of inflation.

Inflation is the mortal enemy of bonds because it erodes the purchasing power of your investment. Unlike a stock, most bonds aren’t going to raise their payments to compensate you for inflation. If you buy a 10-year bond, and inflation averages 5% during that period, the purchasing power of your investment falls by 5% each year. Sure, you may be earning 3% interest on your bond, and that interest will compensate for some of your loss, but even with interest included, you lose 2% of your purchasing power each year.

Given the inflationary outlook for the next few years, I think the best alternative for cautious bond investors is real-return bonds. These are bonds, mostly issued by governments, that are indexed to inflation. If you buy one, you collect an average yield of 2% a year, less management expenses, on top of the inflation rate.

Not many funds specialize in real-return bonds and these funds tend to charge expensive fees for what you get. I think the best way for most people to invest in real-return bonds is to buy a low-cost index fund that simply tracks the real-return market at minimal expense. A good choice is the iShares Canadian Real Return Bond Index Fund (TSX:XRB, MER:0.35%).

If you’re willing to take on more risk, you may want to look at corporate bond funds. But be aware of the dangers. Unlike government bonds, which are nearly certain to pay back your money, corporate bonds may stiff you. If a company falls on tough times, management can stop making bond payments and you’re out of luck.

To help investors assess the risk of default, corporate bonds are rated in terms of their ability to repay their debt. Bonds issued by companies with strong balance sheets and cash flows are dubbed “investment grade.” Those issued by weaker companies are “junk” bonds. Lower-rated companies pay a higher interest rate on their junk bonds to compensate investors for the higher risk that they will default.

At the height of the credit crisis this past year, people lost faith in the ability of even investment-grade corporations to repay debts. Investors stampeded out of corporate bonds and the average yield on investment-grade corporate bonds jumped to 7%. Over the past couple of months, buyers have calmed down and started to return to the market, but you can still earn a 5% to 6% yield on a corporate bond fund.

I think corporate bond funds are an attractive investment, but only if you’re comfortable with moderate risk. Investment-grade corporations have defaulted in the past. Still, an averageportfolio yield of 5% should be more than adequate to absorb several potential losses.

Aggressive risk-takers may want to go even further. High-yield bond funds are yielding a mouth-watering 13% as I write this. But beware. During recessions, it’s common for 10% or more of junk bonds to default. Junk bonds are sporting huge yields these days precisely because investors fear many of them will default. Buyers demand a higher yield to compensate them for the high probability that some of these bonds will simply stop paying.

That said, I believe that current yields are high enough to absorb the likely losses. When a junk bond defaults, you usually recover some of the principal. I estimate that a default rate of 25% would be required before you would actually start losing money. Such a level of defaults is unlikely.

In good company on page 8 lists six Canadian corporate bond funds with reasonable management fees and the best risk-adjusted returns relative to their peers over the past three years. I have estimated the average portfolio yield for each fund based on their most recent income distributions. Those yields range from 5% to 10% (net of expenses). The funds with lower yields put a higher emphasis on lower-risk bonds, and vice-versa. You should choose the fund that best suits your risk tolerance.

In good company

These corporate bond funds have achieved better risk-adjusted returns over the past three years than their peers.

Oddly enough, though, most of us build our investment portfolio without any plan on paper. Stephen Horan, head of private wealth for CFA Institute, a global association of investment professionals, says the typical investor throws money into the market and hopes there will be a big pile waiting when he or she needs it. In other words, we build a house without blueprints.

There is a better way. It’s called an Investment Policy Statement. Most advisers to wealthy clients put one together as a matter of course. But you don’t need a Porsche in your driveway to benefit from an IPS. The biggest benefit of an IPS is that it forces your adviser to talk—to really talk—to you. “Up until that point he might not even know how many kids you have,” says Horan.

An IPS should run between four and 15 pages. It should lay out everything about your financial strategy. When I say everything, I mean everything: how much money you can stand to lose in a market downturn, your long-term objectives, your investment philosophy, your tax and estate situations, how you want your money split between stocks and bonds, how much you’ll need to put aside each month to meet your goals.

Don’t confuse an IPS with one of those flimsy questionnaires the bank hands you before selling you a mutual fund. An IPS is far more detailed. It might stipulate, for instance, that you want to hold only investment-grade bonds or blue-chip stocks. It could note that you have a moral objection to investing in cigarette companies. It may outline your need to set aside extra money to provide care for an autistic child or to pay for the weddings of your three toddlers a couple of decades from now. An IPS should be so detailed and specific that it would allow someone who has never met you to invest your money exactly as you would like.Drawing up an IPS forces you and your adviser to crunch numbers and think through what you need to make your dreams a reality. And that can prevent you from taking foolish gambles with your money. If you discover that a 5% return on your investments is sufficient for you to enjoy a great retirement, an IPS stops you from taking unnecessary flyers on junior mining shares and Ecuadorian bonds.

Once your IPS is written, it provides a steady point of reference. You and your adviser should go over it once a year to see if you’re on track. Just like visiting a house under construction, you’ll be able to see how well your financial goals are coming together—or not.

An IPS is particularly valuable in a crisis, when it can act like a loyal friend, reminding you of your long-term goals, says Tom McCullough, president of Northwood Family Office, a Toronto-based adviser to wealthy clients. McCullough says every financial adviser has seen clients who react to a crash by demanding that their adviser pull their money out of the market. McCullough’s response to such clients: sure, but first you have to rewrite your IPS to reflect your new investing philosophy. The curious thing, he says, is once people re-read their documents,they nearly always decide to stick to their original plan. “They realize their investment strategy is quite sound in the first place.”

McCullough calls this investing sober versus investing drunk. When there’s a crash (or bubble for that matter), we make rash decisions, as if we were drunk. An IPS, however, is written during a moment of sobriety. And sober decisions are usually better than sloshed ones.

Don’t be surprised if your adviser is reluctant to write an IPS. It can take a day or more to put one together. Some advisers simply won’t think it’s worth their time if your investments are less than $100,000. If so, you have several options. The first is to write one yourself. Start by downloading this worksheet. If you still need help, consider hiring a fee-only planner. Such planners charge by the hour. Since they’re not earning money selling you products, they can concentrate on giving you good advice. The other option: fire your adviser and find one who’s less judgemental of the size of your piggy bank. Just make sure he knows a little something about architecture.