Giving up on saving?

You better be ready to keep working well past 65.

10

by

Online only.

10

savings_322

Updated on Jan. 23, 2014.

From time to time—including today—I see some in the media asking the question whether people are “giving up on saving.”  It’s a free world of course and everyone can choose to maximize consumption today, even if it means paying more tax because of foregoing RRSP contributions.

But giving up on saving does have consequences. This choice means you’re also giving up on more consumption in the future, and giving up the chance for freedom (or financial independence) while you’re still young enough to enjoy it.

People are perfectly free to spend to the full extent of current income but leaving no margin for error for job loss or other emergencies is just plain foolish. Any financial planner will tell you that enough savings to last six to nine months without employment income is the minimum prudent emergency cushion—an amount that can now be well taken care of by the cumulative $31,000 in TFSA contribution room now available to any Canadian 18 years of age or older.

Beyond that, giving up on saving really means resolving to stay in the workforce (employers and circumstances permitting) right until 65, or 67 in the case of younger people. Indeed, the November 2013 issue of MoneySense did show how people can retire in luxury merely by finding a low-cost place to live (most of them outside the country) and living off such government income sources as CPP, OAS and GIS (in some combination).

While such a strategy is theoretically possible, “luxury” is a relative term and relying only on government money in old age strikes me as dangerous from a diversification point of view. In the U.S. in particular, given the nation’s parlous finances, putting all your eggs into the basket of Social Security seems an overly optimistic gamble. Not for nothing do the financial gurus counsel a three-legged stool that also includes employer pensions and private savings and investments, not to mention part-time work, real estate income and other “multiple streams of income.”

In the end, taking a defeatist attitude to saving is just making excuses. Blaming low interest rates or volatile stock markets is what my wife and I dub “a frenzy of rationalization” or FOR. It’s true that young people today have far more financial temptations than did the baby boomers: we never had to budget for cell phone plans or Internet access, nor were we under pressure to constantly upgrade to newer and better smartphones and other technological gadgets.

But again, if your perceived “needs” exactly equal your income, then the best you can hope for is to break even financially as the years pass, and that assumes steady employment. Lose that source of income and the trouble soon begins. Saving and investing means ultimately benefiting from the magic of compound interest (or compounded reinvested dividends). Giving up on saving and falling into debt should unemployment strike means the reverse and negative outcome: being subject to the disaster of compounding debt—and unfortunately, the interest rates that seem so minuscule if you’re a creditor turn out to be very high if you’re a debtor.

Far better to be a net beneficiary of even modest interest and dividend income than a victim of it. And that’s why, even though I’m personally on the cusp of findependence, I’m still not giving up on saving.

10 comments on “Giving up on saving?

  1. A lot of the articles concerning the declining number of Canadians contributing RRSPs and the burgeoning accumulation of unused RRSP Contribution Room (now exceeding $500 billion) seem to conclude Canadians are simply not saving and this may not be accurate. Increasing numbers of Canadians are making a conscious decision to reallocate their savings toward the reduction of their consumer and mortgage debts. This is, I think, supported by the most recent bank surveys which show debt reduction is now the top priority – ahead of retirement planning, for Canadians.
    Using one's savings to pay down debt is just another type of "investing" – very practical and basic. (Especially if the debt costs are paid with after-tax dollars.)

    Reply

  2. Absolutely, I always say "A paid-for home is the foundation of financial independence." And the sooner you pay off the mortgage, the soon the same stream of income can be redirected to actual saving and investments.

    Reply

    • I couldn't agree more with you.

      Reply

  3. I am something wondering if the owner ship of a home is overated and in some case it more a big consumer item like car that the society overvalue. For now where I live the condo are sold 300 000$ and house are sold 700 000$ and they don't look great. Me and my spouse have done some calculation and even the cost of the condo utility + tax + condo fee is higher than the basement we rent all include for 1400$. I carefully try to save more than what a home would cost me around 3000$ a mouth in a couch potato style of investment+ my employer pension to the max + my employer share purchase to the max. Am pretty sure that money gonna grow way much than a house. There is no way in 20 years am gonna sell a house of 600 000$ that look not to great to be polite for more than a million with the new rules. Who will have 200 000$ in their account to pay for that? But with a couch potato style is pretty resonable to expect a better rate of return.

    Reply

  4. CIBC's survey did say paying off debt was a priority for Canadians in the new year but at the same time we now have record debt levels

    Reply

  5. I have been saving and investing for 30 years. I know interest rates these days are low but this is no excuse to not save and invest for your future. I can give some examples. If the average income earners say a couple making $70,000 a year put the maximum RRSP contribution of 18% which is $12,600 per year for 35 years at 3.70% in long term provincial strip bonds it would be worth $874,037.14. This is an investment period assuming from 32 to 67 years old. The $12,600 RRSP contribution would get about $4,000 back a year in an income tax refund. If they could save another $7,000 a year and add the $4,000 a year tax refund it would get them $11,000 per year extra to invest. The couple could make 2 TFSA maximum contributions per year.Using the same example above investing in long term provincial strip bonds yielding 3.70% a year contributing $11,000 as a couple in TFSA's it would be worth in 35 years $763,048.29. The couple would have to save $19,600 a year to achieve this goal or $1,633.33 per month. This is a conservative investment plan with current bond yields. You can buy an investment property and pay this per month as a mortgage payment or invest in provincial strips bonds at currently yielding 3.70% per year. The total RRSP's and TFSA's would be worth $1,637,085.43 after 35 years. Finally, this approach is close to balance because 53.38% is in RRSP's taxable income and 46.61% is in TFSA's income tax free income. When interest rates rise eventually even to say 4.00% or 4.50% this calculation will only be much better. So do not get discouraged about saving and investing. If these amounts look to daunting you can try to save 25% of this amount to start and gradually increase you savings. If you saved $4,900 in RRSP's and TFSA's which is 25% of the annual maximum and you added the annual $1,000 income tax refund you would still have $409,271.36 in total RRSP's and TFSA's with the same 53.38%,46.61% balance of taxable income and income tax free income in 35 years. The key is to keep your debts low and pay them off as soon as you can afford to and save and invest as early as possible in RRSP's and TFSA's conservatively. I hope I helped someone today.

    Reply

  6. The middle class and lower class famiies these days can hardly survive and its so very risky these days with investment, i cannot afford to loose any of my principal therefore i am not making any interest on my little saving. Money does make money the more you have the higher the risk you can take do you have any advice for me.

    Reply

  7. I'd like to know how a single person with one income is supposed to do all this saving and investing when they lose their job every few years and must live off minimal savings they were able to accumulate while working at a low paying job without benefits. Asking for benefits as part of negotiations at hiring is useless, because the person is desperate for the job so must take whatever the employer offers or risk continued unemployment. The employer can easily hire the most desperate person who will take the lower wage. Without benefits, the person must pay extra for health care items, which are expensive without coverage. With little savings, banks charge service fees if you cannot maintain a few thousand in your bank account – punish the poor for not being rich. Own a house? I thought that would be a good idea, so I went into debt to be a home owner – except that my corrupt condo property manager and useless Board made stupid decisions and neglected the situation so that we were assessed $30,000 for exterior repairs. Whatever debt I had paid down was all gone at a time when I had lost my job again due to lack of funding for research activities (my area of employment). That area is always getting cuts and downsizing because no-one – especially the government right now – seems to value the important work done by scientists. So I had no job and owed $30,000 NOW (we were given 6 months to pay). And was threatened with legal action – they were going to send the goons to beat me up, apparently, if I didn't pay. YET I had no way to pay. But, the fault wasn't theirs for assessing such an unreasonable bill, it was mine for not being filthy rich. Savings? It all went to my debt. Oh yes, RRSPs: I'd have to go into further debt to finance them. Oh yeah, I'm not a good risk for a loan because the condo board decided I'm going to be poor for the rest of my life. But, yeah, I'll get right onto saving!!

    Reply

  8. Hi,

    I am David, a financial writer. I write on several Financial topic like debt, loans, insurance, investment and so on.
    I came across your domain "moneysense.ca" while searching in Google and enjoyed reading some of your articles. I just want to know do you allow outside article contribution? I would like to write for your blog on some relevant topics that is yet to cover on your blog. I will make sure that my articles will be completely unique and free to serve the purpose of your website. I do believe your readers will enjoy reading it. It will be a thrilling experience for me if my article finds a place in your blog.

    I’m waiting for a confirmation from your end.

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *