There is only one catch. While stocks look like bargains in terms of all the standard ratios — price-to-earnings, price-to-sales, price-to-book — that doesn’t mean that you can buy something Monday and expect to make a profit by Friday. Markets don’t usually bounce back quickly from a

beating like the one they’ve just endured.

If you look at recent bear markets, such as the one that occurred in 2001-2002, you find that markets often fall for 18 months before beginning a sustained recovery. They frequently stage rallies, only to fall back even further. And that’s with a standard bear market, such as the ones that follow a conscious decision by policy makers to raise interest rates and puncture an inflationary bubble. The current downturn may have a much longer life than its recent predecessors, because this time the crash was not triggered by deliberate policy, but by an unforeseen credit crisis.

Credit markets are as important to a healthy economy as arteries are to a healthy body, and the current crisis has clogged them to the point of failure. Lehman Brothers’ failure and the massive losses suffered by other financial institutions have reduced bank lending around the world. The credit crisis that has resulted is disturbingly similar to the 1930s depression and to Japan’s lost decade of the 1990s. Nobody is expecting the downturn to be as bad as those decade-long slumps. But it’s impossible for anyone to determine the extent of the damage, or calculate how long the downturn will last.

The good news is that this bear market will eventually end like all its predecessors, and long-term investors should do well. The bad news is that investors may have to wait longer than they would like to reap their reward. So even though equities look attractive, don’t throw caution to the wind. Stick to the basic rules of investing.

The most basic rule is to maintain a diversified portfolio. To my way of thinking, even the most aggressive portfolio should not have more than 65% in stocks and most people should stick to somewhere between 50% and 60%. The remainder should be in bonds, cash or other investments that can provide you with a cushion if stock markets continue to fall.

Second, don’t overestimate your appetite for risk. If you couldn’t sleep during the past two months because of your stock market losses, you had too much money invested in stocks. Adjust your portfolio so you don’t find yourself in a similar situation in the future.

Third, never invest money in stocks that you will need in the next five years. This ensures that if stocks need five years to regain their losses, you won’t have to sell your investment at a loss.

Fourth, let your portfolio decide what you do next. This means deciding how much of your portfolio should be in stocks, how much in bonds, and so on. Adjust things once a year or after a sharp market move to get back to your target.

Here’s an example: assume you have decided on an asset allocation for your portfolio of 50% stocks and 50% bonds and cash. A 45% loss in the stock market — like the loss suffered by many people over the past few months — reduces your stock holdings as a percentage of your overall portfolio to just 35%. So this is a good time to rebalance, by buying enough stocks to bring the percentage back to your long-term goal of 50%.

What should you buy in those turbulent times? I believe that stocks are so cheap that almost any low-cost index fund that tracks a broad market — such as the S&P/TSX composite index in Canada, or the S&P 500 index in the U.S. — should make you money if you hold it for the long term.

If you don’t like volatility, or you’re investing for a shorter period, I suggest caution. The immediate future for Canadian stocks may be bumpy, so stick to mutual funds or index funds that invest in larger companies such as banks and major oil producers. While Canadian banks are being dragged down by worries over the global credit crunch, and oil companies have tumbled because of falling oil prices, all these companies should be fine in the long run.

I would avoid Canadian small cap funds for now, because of the high number of junior oil, gas and mining firms in this sector. Junior companies have uncertain assets and reserves; they also suffer from higher production costs and weaker balance sheets than their bigger competitors. If oil and commodity prices fall into a long slump, many of these junior producers may not survive.

Utility companies that deliver gas, electricity and water are traditionally regarded as defensive investments, because people need to turn on their lights and be happy with its performance. m

heat their homes no matter how bad a downturn gets. To find funds that specialize in utilities, you have to venture outside Canada. A couple of excellent exchange-traded funds (ETFs) that trade on the New York Stock Exchange specialize in the utility sector and I would recommend them to your attention. The iShares Dow Jones U.S. Utilities Sector Index Fund (NYSE: IDU) charges a management expense ratio of only 0.5% and gives you exposure to a number of U.S. utility companies. At the time of writing, it was selling for only 12 times earnings and paying a 3.5% dividend yield. If you want a global utility fund, choose the iShares S&P Global Utilities Sector Index Fund (NYSE: JXI), which has similar fees and characteristics.

Another way to play defence in these turbulent markets is to invest in a fund that specializes in dividend-paying stocks. The regular dividend payments provide support for your portfolio even if stock prices stay down. But dividend funds still have their risks. One risk is that an extended recession may force companies to cut dividend payments, making the stocks less attractive. Another risk is that dividend funds, particularly Canadian ones, are heavily concentrated in financial stocks, which are experiencing extraordinary volatility. If you want a dividend fund with less concentration on financial stocks, try Phillips, Hager & North U.S. Dividend Income Fund. It has about 20% of the portfolio in financials (versus 40% to 50% for a regular Canadian dividend fund), and some of its top holdings are offering superb dividend yields.

Health care funds represent another defensive alternative. People still use pharmaceuticals and health care even in recession. Plus, this sector has been out of favor for so long that it seems ready for a rebound. Canadian fund companies offer many actively managed funds, but most charge management expense ratios of 2% or more, without any compensating increase in performance. I prefer the iShares Dow Jones U.S. Healthcare Sector Index Fund (NYSE: IYH). This exchange-traded fund charges only 0.5% in fees and has managed to weather the recent storm relatively well. Since January, it is down by just over 25%, versus a 40% loss for the S&P 500. I believe long-term investors will be happy with its performance.

Many parents think the best answer is to pay for a chunk of university expenses. The theory here is that with a degree to their name, little David and wee Sally should be able to take care of themselves for the rest of their lives.

But let’s face it. Some kids drop out of school. Others don’t do much with the BA you paid so much to help them get. You can spend thousands on tuition only to have your kids stock shelves at Wal-Mart. Talk about a lousy investment.

So maybe it’s best to wait and see how your kids turn out as grown-ups. Let them struggle through school and the early part of their career. Then, when they’re married, expecting a baby, and trying to scrape up enough money for their first house, you can swoop in with a fat down payment. But that strategy, too, can have its drawbacks, especially if your child’s marriage isn’t as solid as you might like.

The one sure thing is that it pays to think through your options early. “At one point or another every parent has to deal with this question, because children are going to go through periods where they have financial needs,” says Tim Cestnick, an accountant and financial expert in Burlington, Ont., and author of Winning the Education Savings Game.

A good starting point is acknowledging that each one of your children is different. Since nobody knows your kids as well as you do, consider these three strategies for three different types of children:

• The A student. If Junior is a superior student, your choice is simple — help him out with university fees. “Paying for your kids’ education gives you a bigger bang for your buck” than any other option, says Vera Adamovich, a certified financial planner in Ottawa, because when you contribute to an RESP, the government puts in money as well. Plus, “if I help my kids with an education, they’re going to more easily be able to afford a home of their own,” she says.

A bit of parental assistance during university can make a huge difference. Students who graduate with debt owe a median $24,000 in government loans. That debt can hang over their heads for a decade or longer, especially if they’re not making much money at their first jobs or if they’re heading off to medical school or graduate school after finishing their first degrees.

If you think your children are bright but unmotivated, your best plan may be to pay only part of their school bill, says FrankWiginton, a certified financial planner at TriDelta Financial Partners in Toronto. “If some of their own money is at stake, they’ll try harder,” he says. Better yet, use a carrot-and-stick approach, as Wiginton’s parents did. He had to pay for his university fees up front, but each time he passed a course, his parents reimbursed him for the cost.

• The college kid. For kids going to college, consider a different approach. Why? Because college tuition is cheaper than university tuition and kids often end up living at home if they go to a local school. There’s no reason they shouldn’t pay for a big chunk of their education. Unfortunately, college grads tend to earn less throughout their career, so instead of underwriting their education, you may want to wait until they need help with the down payment on their first home. Over time, your assistance will probably help them as much financially as a university degree. For instance, putting up $50,000 for their down payment on a $250,000 home will lower their monthly mortgage payments by about $440.

But giving kids money for a down payment can get tricky. If their marriages fail, their ex-husbands or ex-wives will get half of that down payment’s value, assuming the house is sold. “I’ve seen situations where the parents were very resentful when that happened,” says Adamovich. The solution is to loan — not give — your son or daughter the money. You never have to collect on the loan if your child stays married, but you can always call in the loan if your son or daughter get divorced.

• The stay-at-home son. No matter what level of school your kids reach, they will probably hang around your house a lot longer than you think. About a third of 25-year-olds still live with their parents, according to Statistics Canada, compared to only 16% in the early 1970s. The good news is if you’re still sharing the rec room with your thirtysomething son, you can give him a motivation to move out and a helping hand in life at no cost to yourself.

All that’s required is the ability to talk tough. When Wiginton got his first job after university, he was still living at home. His parents insisted on charging him $400 rent a month. Two years later, he got a different job in a different city. But before he moved his parents surprised him by giving him back every cent he had paid in rent. “They didn’t need the money. They put it in a savings account for me,” he says. “And that money came in really handy because there are a lot of costs you have when you’re first out on your own. It was a getting-started-in-life account.”

The place to start is with your cell phone company. It will post international rates on its website, as well as a list of which countries it offers service in. Inquire if it offers any special deals that cover the area you’re visiting. You won’t have any trouble getting a package that covers the U.S., but it’s harder to save money elsewhere. For instance, the cheapest plan Rogers offers for Southeast Asia is $230 for 100 minutes. If you are going to make a lot of calls, it’s worth it. But otherwise stick to the roaming rate of $1 to $3 per minute. Or try text messaging: it’s 60 cents a minute.

Another thing to ask is whether your phone works overseas. Why? Because just as Apple and PC aren’t compatible in the computer world, there are two competing cellphone standards: CDMA and GSM. CDMA is more common in North America, but GSM is popular in the rest of the world, and a CDMA phone won’t work in a country that only has GSM service.

One solution is to buy a new phone on vacation. In Europe and Asia especially, you can easily buy a phone at an airport kiosk. In the U.K., Vodafone sells phones for about £30, or $56 Canadian. With a pay-as-you-go card it’s 20 pence a minute (about 37 cents Canadian) versus $1 to $3 using your own phone.

A friend of mine who travels frequently has an even better way. When his plane lands, he heads to the nearest phone outlet to buy an SIM card–a fingerprint-sized device found in the back of all GSM phones. By swapping his phone’s SIM with one from the local phone company, he pays the cheaper local rates. In Singapore, for instance, a SIM card cost him $50 (U.S.) but he paid only 20 cents a minute.

The downside of swapping SIMs is your phone number changes. Also, phone companies prevent you from switching SIMs by “locking” their phones.One solution is to have two phones: one for home and another unlocked phone so you can change the SIM wherever you go, says Salim Jamal of RoamSimple.com, a Toronto company that sells SIM cards to international destinations for about $19 and second-hand unlocked phones for $50.

Of course, there’s another alternative that costs nothing. Just turn off your cell phone on vacation. Then you can really relax.

Property taxes are usually based on what government assessors think your house would fetch on the market. The higher the assessed value, the higher your taxes. A homeowner in Mississauga, Ont., with a house valued at $300,000 will pay $500 less in taxes a year if he can prove it’s worth only $250,000. His total savings could multiply to $2,000 since homes are assessed only every four years or so.

Getting your assessment lowered is time-consuming but not impossible. You should start by calling your local assessment office and asking to speak to the person who valued your home, says Bob Topp, chairman of the Coalition After Property Tax Reform, a citizens group based in Toronto. That’s what he did four years ago when the assessment on his cottage near Parry Sound, Ont., doubled. Topp, a retired investment specialist, told the assessor that since there was a busy road going right by his cottage, his property was less desirable than his neighbors. “I just kept talking and he finally agreed to lower my assessment.” Though Topp’s taxes rose, his appeal cut the amount by nearly $1,000.

No matter who you speak to, be prepared to explain why your home is overvalued. A home’s value is primarily determined by the neighborhood it’s in. But there are special circumstances that assessors sometimes overlook, says Paul Cappa, a consultant at Cohen Highley, a law firm in London, Ont., that specializes in real estate. If your house is on the edge of a busy street or backs onto a railroad track or industrial property, it’s worth less than a house on a quiet tree-lined street just a few hundred metres away. The condition of your home is another factor. A house without a paved driveway is worth less than one with a paved drive.

But to prove your case you have to know what other homes are worth. The easiest way is to identify houses that you think are comparable to yours and that have recently been sold. Then ask the new owners what they paid. In some provinces you don’t even have to leave your living room to get detailed information. In Ontario, for instance, the Municipal Property Assessment Corp., which handles assessments, will let you compare your house to 24 others in the same neighbhorhood at https://portal.mpac.ca/wps/portal/.

Cappa also advises you to check and see if there are any errors on your home’s assessment. Maybe the assessors thought your basement was finished even though it isn’t, or they thought you have two washrooms when you only have one. “They may not even have the lot size correct,” he says. “It’s little details like that which can ultimately make a difference.”

• If you have a savings account or chequing account with a Canadian bank, a federal crown corporation called the Canada Deposit Insurance Corp. (CDIC) covers you for losses of up to $100,000 if the bank goes bust. Same goes for GICs of five years or less. But note that the coverage may not extend to Canadian branches of foreign banks — check at www.cdic.ca to find out if your institution is covered. Note, too, that the $100,000 limit is for all your non-registered accounts with a single bank. So if you have $80,000 in a savings account and another $80,000 in a chequing account, you are covered for only $100,000 — not the $160,000 total.

You can stretch your coverage if you divvy up your money btween registered and non-registered accounts. While you are only covered for up to $100,000 of losses on all your non-registered accounts with a single bank, the CDIC will cover you for another $100,000 in RRSPs and yet another $100,000 in RRIF accounts. You are also covered for up to $100,000 on non-registered joint accounts.

• If you have a life insurance policy with a Canadian insurance company, your benefits are protected by Assuris, a not- for-profit organization funded by the life insurance industry. Deposits are covered for up to $100,000. (www.assuris.ca)

• If you have an account with an investment dealer, the Canadian Investor Protection Fund will cover you for up to $1 million in cash and securities, provided the dealer is a member of the Investment Industry Regulatory Organization of Canada. (For a list of members, go to www.cipf.ca.) • If you’re a member of a defined benefit pension plan and your company goes bankrupt, you may have reason to worry. Most pension plans come under provincial jurisdiction and provinces vary widely on their rules. If your pension plan is underfunded, your monthly payments may be less than anticipated. Ontario is the only province to insure the pensions of bankrupt companies through its Pension Benefits Guarantee Fund (PBGF), which backstops the first $1,000 per month in pension benefits per plan member if a company goes bust

The 16,000 or so students from around the world who are admitted each year to these eight elite U.S. institutions enjoy some of the best educations in the world. At Yale, for instance, undergrads can sign up for a course called Amazon Rain Forest Expedition and Laboratory, which includes trekking to Ecuador with their prof to study rare plant life. Graduate students can debate faith and globalism with former British PM Tony Blair.

When Whitney Laughlin attended Harvard in the mid-1980s as a graduate student, she was mentored by John F. Kennedy’s secretary of health, education and welfare. “I got to go to his house once a week for tea and to talk over my papers,” recalls Laughlin, now a Victoria-based educational consultant who helps promising students get into top schools across North America. “I felt like I was rolling in chocolate! The kind of resources you find there….”

The schools that make up the Ivy League are Harvard, Yale, Princeton, Cornell, Dartmouth, Brown, Columbia and Penn. All of them are located in the northeastern U.S. and all of them — as their collective name suggests — are old enough to boast ivy-covered walls. Most were founded back when the U.S. was still a British colony and even the relative newcomer, Cornell, dates back to 1865. But it’s not just old stones and weathered residence halls that give these schools their clout. They boast star-studded faculty rosters and alumni directories that read like an A list of celebrity and power. Both Barack and Michelle Obama are Ivy alumni, as is George Bush. So, for that matter, are Matt Damon, Natalie Portman and Conan O’Brien.

Tuition alone at an Ivy runs about $35,000 (U.S.) a year, compared to $5,000 or $6,000 at Canada’s top universities. Remember, though, that you’re buying your child a lifelong legacy. Rather than delivering vast, anonymous lectures to hundreds of students, as so many Canadian universities do, Ivy League schools pride themselves on offering their students individual attention. At Princeton, there’s one faculty member for every five undergraduates.

When kids graduate from an Ivy League school, they earn paycheques in keeping with the quality of their education. The most recent College Salary Report by PayScale, a Seattle firm, says the median starting salary for an Ivy League grad is 32% higher than for those who chose liberal arts colleges. According to PayScale, Ivy Leaguers will still be ahead a decade into their careers, raking in 34% more than non-Ivy Leaguers.

The hefty financial payoff makes Ivy League tuition sound nearly reasonable — but your child’s shot at an Ivy League education hinges on more than you being able to cover the fees. All of these schools, but Harvard, Yale and Princeton especially, enforce admission standards that reject all but the highest-achieving teen. An A average and valedictorian status are strictly ho-hum stuff; your kid better be a concert-level musician or top athlete, too. Harvard rejects 91 students for every 100 who apply — and most of the rejected applicants are the best students in their high schools.

So what do you have to do to get your kid into an Ivy League school? Start by thinking of the admissions process as a project that begins in elementary school. At a minimum, your child has to be a stellar student. And academic prowess is just the beginning. “We estimate that over three quarters of the students who apply for admission to Yale are qualified to do the work here,” says the Yale website. “The great majority of students who are admitted, however, stand out from the rest because a lot of little things, when added up, tip the scale in their favor.”

Just what might help your kid stand out? Athletic achievement is good, says Laughlin, the college counsellor. She’s working with an excellent student who’s also an excellent sprinter, so the plan is to find out which schools “need someone to run the 100 metres” and apply there.

Hailing from outside the U.S. might work in your kid’s favor. Admissions officers at the Ivies strive to create a mix of students from a wide range of backgrounds, which could result in the gifted kid from Manhattan being passed up in favour of, well, Laughlin’s client from a small town called Pincher Creek in Alberta. She thinks her client has a great shot at Harvard not only because of his phenomenal vocal music skills (Harvard offers a program with the New England Conservatory), but because of his address: “If he were from San Francisco, he wouldn’t be nearly as appealing as he is from Pincher Creek.” She encouraged yet another of her Canadian clients to apply to Brown, which she calls “the quirky Ivy,” because of the girl’s ability to write economic policy statements. The key in all these situations is to decide on your “hook” — your unique selling point. Then figure out which university is looking for that kind of student, and play up your unique features in the admissions essay.

Or you could hire someone like Laughlin to do that legwork for you. The Independent Educational Consultants Association estimates 22% of freshmen attending private colleges have hired a college consultant. The hotshot in this field is Michele Hernandez (author of A is for Admission: The Insider’s Guide to Getting Into the Ivy League and Other Top Colleges), who charges as much as $40,000 per kid. She isn’t shy about her success rates, claiming on the home page of her business website (www.hernandezcollegeconsulting.com) that 24 out of 29 clients were accepted at Ivy League universities for 2006/07.

And if your kid doesn’t get in? Don’t lose heart. For Laughlin’s money, there are many other universities as good as the Ivies. Depending on your kid’s interests, they may be even better. Still, she concedes that prestige looms large in the minds of many of her clients. “A lot of my kids from Asia are focused on the schools they’ve heard of — Stanford, the Ivies.” When she suggests alternatives that might be a better fit for their ultimate career goals, their response is “Oh, my God, I could be going to a school I’ve never heard of!”

Your first step should be to assess the damage. Opening your brokerage statements will create a sinking feeling in your stomach, but facing the music will make you feel better in the long run. If your net worth is still ample, you can breathe a sigh of relief. If your portfolio has shrunk to the point where it no longer meets your needs, you can begin planning what to do about it. Here are some possibilities.

Update your financial plan — or get one. If you’re uncertain about your financial situation, it’s time for your financial adviser to prove his or her value. Get your adviser to update your financial plan to reflect the new reality. Don’t have a financial adviser or your broker doesn’t do plans? Consider getting a fee-for-service financial planner to prepare one. While a good plan won’t come cheap, the peace of mind you might get from it could prove invaluable.

Stop the bleeding. If your plan comes up short, don’t panic. It’s probably not as bad as you think. Categorize your expenses into basic needs (the must-haves) and discretionary expenses (the nice-to-haves). If you find that your portfolio covers your must-haves but not all your nice-to-haves, that’s discomforting but not disastrous. “It relieves anxiety to be able to say ‘Maybe it’s not quite the lifestyle I want, but I am going to be OK’,” says Karin Mizgala, a financial planner and educator with the Women’s Financial Learning Centre in Vancouver.

If there is a gap between your income and your expenses, clamp down on your spending until you have a chance to think through the situation. You might be surprised how much difference a few economies can make. Tony Mahabir, a financial adviser with Canfin Financial Group in Oakville, Ont., points to the example of two of his clients, a Mississauga, Ont., couple in their early 60s who were about to retire with just enough money to cover their spending needs. The recent crash slashed the value of their holdings and created a $600-a-month gap between their needs and their means, says Mahabir. The couple discovered they can cut $300 a month by reducing restaurant meals, gifts and vacations, as well saving insurance on a second car by parking it in their garage for the time being. They’ll see if markets recover before making longer-term changes.

If the gap between your needs and your means can’t be easily resolved, start rethinking how you live. You’re likely to find that many nice-to-haves, and maybe even some of your must-haves, aren’t so necessary after all. Mizgala gets new clients to fill out a questionnaire, which includes questions about what they would like to do if money was no object. Surprisingly, most of the answers turn out to be non-material things, such as volunteering, and taking courses in art and music. “Maybe this is a chance to focus less on the material,” she says. You can save thousands of dollars a year by selling a second car. You can also take cheaper vacations, cut back on golf, curb gifts, and have family dinners at home instead of at a restaurant. Chances are that these economies will affect your happiness less than you think.

Work part-time. If you’re still relatively young and healthy, consider finding part-time work that you also enjoy. Use those earnings to help pay the bills until your portfolio has time to recover.

Part-time work provides benefits, such as social contacts and stimulation, that go beyond money, says Wayne Taylor, a financial planner with Taylor Financial Group in Edmonton. “You shouldn’t sit around and be a couch potato,” he says. To keep active, Taylor’s retiree clients work at a huge range of jobs: developing training programs for financial advisers, driving empty trailer units between Edmonton and Ft. McMurray, serving customers at a home renovation store, selling cars, and working at a greenhouse.

Even a bit of part-time work can make a big difference. Teresa Black Hughes of Solguard Financial Ltd./PEAK Securities Inc. in Vancouver has been advising a couple in their mid-60s who made a poor investment in a small business. They had been planning to work part-time for three years in retirement to help rebuild their finances. As a result of the recent crash, they will need to keep working an additional one to two years to get their finances back on track. That will be a chore, but it is not a huge penalty to pay for suffering through a major stock market crash.

Practice patience. Most portfolios aim for some long-term balance between stocks and fixed-income investments such as bonds and GICs. For example, some retirees choose a 50-50 asset allocation — in other words, half stocks and half fixed income. But the market crash is likely to have knocked this careful balance awry. Since stock prices have been hammered, your holdings of stocks will proably make up a far smaller part of your portfolio than before.

For the time being, that’s fine. It makes sense to satisfy your cash needs by selling down the GIC or bond part of your portfolio. That will give your beaten-down stocks a chance to recover.

You may eventually consider getting back to your target asset allocation by rebalancing — in other words, by selling some of the fixed income portion of your portfolio and buying more stocks. However, most retirees should err on the side of caution. Given the huge uncertainties out there, rebalancing your portfolio now is only for braver investors. More cautious investors should wait until the market has settled down.

Balance risk and reward. You’ve now seen the fury of a full-scale stock market crash. How do you know if it makes sense to stay invested in stocks? How do you know when it’s safe to put some money back in?

Reading a bit of stock market history can help put things into perspective. You’ll find that crashes are more common than you may think, but rebounds always come eventually. The best long-term combination of risk and reward comes from maintaining a balanced menu of investments — a mixture of stocks as well as fixed-income investments such as GICs and bonds. Stocks have historically provided the best long-term returns, but are risky. In contrast, fixed-income investments offer lower profits, but are a lot more dependable.

Experts generally recommend that retirees keep no more than half their money in stocks and ride out the market swings. But that assumes you can patiently wait for a market recovery at an unknown date. Only you can assess whether this general advice works for you. Are you still OK with taking risks with stocks? Can you still afford to take those risks? Can you afford not to? Many retirees with limited resources face a real dilemma — the more they need the higher long-term returns that stocks can deliver, the less they can afford to take on the risks that go with stocks.

Consider the case of a single woman in her mid-70s who lives in a Toronto suburb. Her finances were already stretched before the October crash. She relied on income from her $70,000 investment in a balanced mutual fund to top up what she receivedfrom government pensions and annuities, says her financial adviser, Sailesh Raythatha of Investment Planning Counsel in Mississauga. The woman had already tightened her expenses over the years and regarded spending of about $3,000 a month as essential.

Then came the October crash. The value of her balanced fund tumbled to about $60,000. She and Raythatha realized that she would probably be better off in the long run sticking with the balanced fund and giving it a chance to recover. But with a potential recession looming on the horizon, there was a distinct possibility that stocks could drag her balanced fund farther down for a long time.

There was another option — she could convert her nest egg to GICs. This would provide much greater safety, but the modest returns would probably be too low to allow her to maintain her current level of spending past her mid-80s, according to Raythatha’s calculations. She faced a strong chance of outliving her savings. So should she risk further declines with the balanced fund or go with the inadequate but safe returns from GICs?

In the end, she chose to follow Raythatha’s recommendation and convert to GICs. “It was a tough decision,” says Raythatha. “I didn’t want to advise her to take the risk that her portfolio might go down another 10% or 15%.” Fortunately, her client also owns a house worth about $200,000 that she can tap into as a last resort if she runs out of investment money. In a case like this, there is no perfect answer. But by working through the numbers, you can assess just how much risk you are prepared to take on.

Steve, 40, and Krista, 36, live in the Edmonton suburb of St. Albert. Steve used to be a truck driver. But after his eldest daughter was born, and he was stuck on another long-haul drive to northern British Columbia, he quit, went back to school and became a welder so he could spend more time with his family. Krista shares his kids-first philosophy. She operates two private schools in town.

Like most middle-class couples with young children, the Robinsons (whose names we’ve changed) spend their days in a blur of activity. They rise early, grab breakfast with their two daughters, Julia, 8, and Sarah, 7, then rush out the door to drop the kids off at school and get to work. A few hours later, they scurry home, make dinner, and take their daughters to skating, violin and karate classes.

Together Steve and Krista earn slightly more than the average Canadian family, and they try to be smart with their money. They pay off their credit cards every month and they own just a single vehicle — a 2001 GMC pickup truck that Krista drives to her work. Four years ago they bought a house for $230,000 and took out a 20-year mortgage. They’ve accelerated their payments and they are hoping to have their home paid off in 14 years.

If Steve keeps his welding job and students keep enrolling at Krista’s schools, things should work out just fine. But Steve and Krista don’t feel as if they have it made. Far from it. Whenever they look at their bills at the end of every month, they realize that they are skating on the brink of catastrophe. They have no savings to fall back on if something should go wrong, no RRSPs or RESPs to cash in down the road. A while back, Krista tried to set aside 10% of their earnings, but that didn’t work out. She had to put the money back into their general account to pay bills. She worries constantly about her family’s lack of a financial buffer.

So what are Steve and Krista doing wrong? If you listen to many commentators, their problem is a simple lack of self-discipline, a selfish desire to have everything at once. A recent headline in the Vancouver Sun blares: “Overspending rampant among young.” The Montreal Gazette concurs; according to its headline writers, we are “a nation of overspenders.” A study, commissioned by Mackenzie Investments, deplores the tendency of Canadians under 50 to spend without thinking about their financial future. And economists moan about the declining saving rate. While Canadians put away nearly 20 cents out of every dollar they earned back in the 1980s, today we save less than three cents out of every dollar we make.

The conventional wisdom adds up to a stinging indictment of today’s spendthrift middle class. It sounds convincing — until you talk to folks like Steve and Krista. They and their two daughters shop at a local discount supermarket and get by on less than $500 a month in groceries. They rarely eat out. While Krista says they would like to take the kids to Disney World, all their vacations so far have been visits to family in B.C. “There’s nothing fancy in our household,” Krista says. The family’s only indulgence is a single television — a 42-inch floor model they bought for half price. But Steve refuses to spring for cable access, because he would rather his daughters read books than watch TV.

The simple fact is that Steve and Krista are doing nothing wrong. They make a bit more than average, spend wisely, and just barely make ends meet. Millions of middle-class families across the country are in the same boat. Their paycheques show they’re making decent money. But their bank accounts are empty.

How is that possible? For more than a quarter century, middle-class incomes have flat-lined in terms of real purchasing power. Meanwhile, a host of unavoidable costs — for necessities such as taxes, child care and mortgages — have surged. Even with both parents working full-time, the middle class is drowning in a sea of rising costs. The result is a paralyzing sense of economic vulnerability. With a recession looming ahead of us, the middle class is facing potential disaster. Yet no one appears to be paying attention.

The natural place to begin understanding the middle-class squeeze is by looking at how much each of us earns. We all know that we make far more in dollar terms than our parents did 25 years ago. But what most people don’t realize is that nearly all of the apparent increase is inflation. If you strip away the impact of rising prices, the years between 1980 and 2005 turn out to be a dead zone for middle-class prosperity. During this period, in terms of inflation-adjusted dollars, the median annual salary for a full-time worker rose all of $53 — that’s right, $53 a year — to $41,401, according to Statistics Canada. A quarter century of progress has resulted in the average Canadian earning a raise equivalent to the cost of a family night out once a year at Swiss Chalet.

Actually, that’s optimistic. Because while a pay raise once went straight into your pockets, it is now likely to disappear before you even see it. Who gets it? The taxman. A generation ago, the average Canadian family handed over about 36% of its income to government in the form of income taxes, property taxes, sales taxes and so on. Today that figure is a staggering 45%, according to the Fraser Institute. So while our wages have stayed pretty much the same, we are paying thousands of dollars more every year to various levels of government.

It’s no wonder that Steve and Krista are stressed. They’re not making any more money than their counterparts 25 years ago, yet government is always reaching into their pockets to take more of what they do earn. Meanwhile, other costs are mounting.

Education, for instance. A generation ago, most families didn’t worry about saving for their kids’ university tuition, because you could still find a decent job with just a high school diploma. Besides, if your kids really wanted to attend university, they could probably pay most of the cost themselves, by getting summer jobs.

Not so today. The ticket to a decent job is at least a college diploma, if not a bachelor’s degree, and the price of that ticket has shot up: tuition fees for most college and university programs have roughly tripled since 1990. Meanwhile, it’s become tougher for students to get a summer job to pay those fees. Only 66% of college and university kids can find paid work on their summer vacation, compared to 75% in 1989. As a result of higher tuitions and lower student earnings, middle-class parents who want to ensure that their children have middle-class jobs must count on helping out with their kids’ education. Between 1999 and 2004, average household spending on tuition and school supplies rose by nearly half to $1,078 a year, according to People Patterns Consulting of Summerstown, Ont.

Roger Sauvé, president of People Patterns Consulting, says education is just one example of the rising costs that are hitting Canadian families. “A lot of the things people are spending money on, they have no choice over,” says Sauvé, who specializes in dissecting Statistics Canada data to reveal patterns in household finance. Health-care costs, including premiums for prescription drugs, shot up 32% between 1999 and 2004. Insurance premiums and pension fund payments increased nearly as much. All told, Sauvé figures those increases added $1,503 to a family’s cost of living in only five years.

If you’re feeling pinched, no wonder. Many of the fastest rising costs — such as pension contributions — are automatically deducted from our paycheques, so most of us are left with a vague notion that we should have more money to spend than we do, but no clue as why we’re short every month. “Your paycheque,” says Sauvé, “doesn’t go as far as it used to.”

To our credit, Canadians have taken action against flat salaries and rising costs. Families have fought back the only way possible — by sending mom out to work to bring in another paycheque. A generation ago about 47% of families had two earners; today it’s 64%. Whatever else you can say about Canadians, we’re not afraid of work.

The rise of the two-income household has provided a smart solution to stagnating wages. By bringing in an extra paycheque, the average Canadian household has boosted its income despite the lack of any real increase in individual paycheques. Thanks to working moms, the median family income edged up, in real terms, by about $5,800 between 1980 and 2005, to $63,715. The social benefits of this trend have been even larger than the financial gains. Women can now pursue careers that would have been considered unusual for them just a couple of decades ago.

The only problem is that two incomes aren’t really worth twice as much as one. To earn an extra salary, a family has to take on extra costs. Day care is the most obvious expense. A family with a couple of kids under five can expect to pay from $18,000 to $24,000 a year. And that’s just the beginning. Most two-income families need two cars to get mom and dad to separate places of work. According to the Canadian Automobile Association, buying and operating that extra new car is likely to cost you in the neighborhood of $8,000 a year. Two-income families also face added expenses for work clothes, meals away from home, and so on.

By the time you add everything up, the benefit from an additional paycheque is less than most people think. Elizabeth Warren, a professor at Harvard Law School, has made a career out of tracking the dwindling fortunes of the middle class in the U.S. and many of her findings are equally applicable to Canada. To illustrate her point, she’s fond of comparing how today’s middle class spends its income compared to how its predecessor managed its budget back in the days of muscle cars, big sideburns and bell-bottom pants.

In the early 1970s most families had just one wage earner and his name was Dad. He didn’t make a lot of money, but he didn’t need to. Warren calculates that after paying the family’s fixed costs — taxes, the mortgage, car expenditures and health care — ’70s Dad was still left with nearly half (46%) of his paycheque. Some of that disposable cash went to groceries and paying the electricity bill, but there was plenty left over to save for a new car and maybe a few indulgences, such as a color TV set or a fishing rod.

Today’s family has two wage earners: Dad and Mom. On paper their combined income is a lot more than ’70s Dad, but they see a lot less of it. Once the rising costs of taxes, the mortgage, car payments, health care and child care are covered, only 25% of their paycheques is left. “After they pay their basic expenses,” says Warren, “today’s two-income family has less cash left over than their one-income parents had a generation ago.”

Warren argues that there is a great paradox hidden beneath the shiny surface of the two-income family. As apparently affluent as it may seem, the two-income household is hypersensitive to any economic downturn because it needs every penny to get by. In contrast, ’70s Dad and his family were in much better shape, because the family had an underutilized resource — namely Mom. If ’70s Dad were laid off, or suffered a serious illness, Mom could get a job and help out until times got better. But not anymore. She’s already working flat out. If today’s Mom or Dad gets hit by a job loss or an extended illness, their family has no cushion to fall back on, no extra resources they can call upon.

Steve and Krista are the first to acknowledge that a family needs two incomes in today’s economy. When Steve quit his job as a trucker, times were tough. Krista’s single paycheque had to support the family. “We did everything we could to stay afloat,” Steve recalls. “We ate Kraft Dinner for three years.” If a recession materializes in the months ahead and one of them were to lose their jobs, they would soon be eating Kraft Dinner again.

You might think that the plight of today’s middle class would have attracted a lot of attention. Strangely, it hasn’t. If anything, people have tended to blame the victims for their own misfortune. The personal finance books that top the bestseller lists make the case that most people are buying stuff they don’t need, such as designer clothes and stainless steel appliances and — oh, yes — that latte a day that we’re all supposedly drinking. According to the doomsayers, our out-of-control shopping habits are coming back to haunt us.

The only problem with this denunciation of middle-class overindulgence is that the facts don’t bear it out. Rather than going on a spending spree, today’s average income earners appear remarkably frugal. Warren, the Harvard professor, crunched U.S. Department of Commerce data to determine how middle-class families with two adults and two kids spent their cash in 1972 and in 2005. She adjusted the figures for inflation and found that, among other things, families are spending 32% less in clothing now than they did a generation ago. The reason? Most people don’t dress up as much, which means fewer suits and fewer expensive dress shoes. In addition, foreign manufacturers are churning out most of the goods we wear for lower prices, in real terms, than 30 years ago. Discount retailers have slashed the price of getting those goods to us. While your Dad probably paid full price for his North American-made suits and ties at a local men’s shop, and your Mom relied upon the local dress shop for all her formal wear, you’re likely to drop by the local factory outlet mall to load up on the Korean-made khakis and casual sweaters you wear to the office everyday.

The same surprising frugality holds true in other areas of middle-class life. Thanks to offshore manufacturing and low-cost retailers, the price of most household goods has tumbled and so has the amount we spend on them. Stripping out the effect of inflation, Warren finds that we’re spending 52% less on appliances than our parents did, even when you factor in all those fancy convection ovens and double-door refrigerators that we’ve installed. We’re also spending 18% less on food, even with our newfound taste for lattes and bottled water. While those numbers are for U.S. middle-class earners, it’s reasonable to assume that all the same trends hold true in Canada. You can accuse today’s middle class of many things, but out-of-control shopping isn’t one of them.

So where is the money going? We’ve already mentioned day care costs and the expenses associated with a second car. It turns out that we’re also spending far more than our parents on going to the gym and kids’ recreational costs — although that’s arguably a good thing if it helps to keep us healthy and happy as families.

Looming larger than all those costs is the monster in the room — mortgage costs. The average price of a home in Canada’s major markets has soared since 2000, shooting from just over $160,000 to $315,000. Last year the ability of the average Canadian to own a home was at its lowest point since the last housing bubble in 1990. The cost of owning a two-storey home, including mortgage, taxes, upkeep and utilities, took up 48% of the typical pretax household income. It was more in big cities like Vancouver and Toronto.

“I don’t think Canadians are reckless or extravagant spenders. I’ve never seen any evidence of that,” says Malcolm Hamilton, an actuary at Mercer consulting in Toronto and one of the country’s foremost authorities on personal finance. He believes that middle-class financial stress is largely the result of runaway real estate prices. For younger Canadians in big cities, the spike in real estate prices over the past decade has meant a no-win decision. “They have this ugly choice,” Hamilton says. “They can spend less for a place 60 miles outside of Toronto and be commuting three hours a day and hardly ever see their children. Or they could pay up for the house in the city and have everyone say they’re irresponsible, because they borrowed so much money to live near where they actually work so they can spend more time with their family.”

You don’t have to live in a big city to feel like you’re struggling. Just ask Karen and Ryan MacDonald, both 30, who live in Fergus, Ont., about an hour and a half northwest of Toronto, with their daughter Lauren, 4, and son Harmon, 2. They met at fire college, got married six years ago, and bought a house. Today, Karen’s a fire prevention officer at the University of Guelph while Ryan works for a company that maintains fire equipment. Like most young families, they struggle to balance the budget. With car payments, day care costs and bills, it’s tight. “It seems like we’re not saving, though we are a little bit,” Karen says. Every month she puts money into her pension plan at work and an RESP. But the MacDonalds worry they won’t be able to pay off their mortgage, credit cards and line of credit in time for retirement. They have no savings set aside for unexpected emergencies. A few months ago they took their truck in for servicing and were told it needed $1,000 in repairs. “Well, we didn’t have $1,000 to pay for that, so it goes on the line of credit,” says Karen.

The MacDonalds are not alone in relying upon credit. While the old-fashioned answer to a money crunch was to have mom supplement the family income by working part-time, that solution no longer suffices, because mom is already putting in 40 hours a week at the office. The only solution to many financial emergencies is to charge things. The average Canadian owes $9,000 on a line of credit and $2,400 on credit cards. Slightly more than half of us need credit to cover day-to-day living expenses, according to the Certified General Accountants Association of Canada.

The growing indebtedness of the middle class has happened during some of the best times that Canada has ever experienced. We haven’t suffered through a recession in 15 years and jobs have been plentiful. Yet average families haven’t made any gains during the heady days of the late 1990s or during the recent boom years. Instead, we’ve accumulated debt.

An amazing fact: after years of strong growth in the overall economy, the typical middle-class family is on shakier ground right now than it was at the end of the devastating recession of the early 1980s. In 1984, the total amount owed by an average household, including mortgage and credit card debt, added up to 71 cents on every dollar earned. Today, after a decade and a half of prosperity, we owe $1.27 for every dollar of income.

If a recession hits and house prices fall, watch out. People who’ve relied on overtime earnings to maintain their lifestyle will have to make do with less. Same goes for homeowners who’ve dipped into the equity in their homes. Many middle-class Canadians may find themselves unable to keep up.

Doug Hoyes, a bankruptcy trustee with Hoyes Michalos & Associates in Toronto, says he sees a stream of people through his office who never dreamed they would be declaring bankruptcy. His typical clients make decent wages — $2,071 a month after tax, to be precise. Their debts are high, but payments are manageable — until a divorce, a layoff or a serious illness strikes. At that point, they’re sunk, because they’re operating with no margin of error. “I’m of the opinion that the average person does not realize how close to financial disaster they are,” says Hoyes.

If the plight of the middle class isn’t the result of runaway spending, or of a refusal to go out and work, what is behind it? More than anything else, it’s the result of a shift in how society apportions rewards.

Think back to that measly $53-a-year raise that the average Canadian worker has gotten since 1980. It amounts to considerably less than a 1% hike in purchasing power over 25 years. In contrast, labor productivity over the same period has shot up 44%. So while Canadians are producing nearly half as much again as our parents did, we are enjoying practically none of the gains. The fruits of our labor have, by and large, gone to bulk up corporate profits which have shot up 153%, in real terms, since 1980.

You don’t have to be a socialist to wonder about the fairness of that arrangement. Mathieu Dufour, an economics professor at Dalhousie University in Halifax, is among those who are troubled by the disparity between measly wage gains and galloping increases in corporate profits. He calculates that if our wages had simply kept up with the gains in labor productivity, the average Canadian would be earning an extra $10,000 a year.

Dufour thinks it’s time to find ways to put more of that missing $10,000 into middle-class wallets. A good first step would be to cut individual income taxes, perhaps by raising corporate rates. Such a shift in tax policy would help to redress the massive transfer of wealth from ordinary people to the government that has taken place over the past two decades.

In the 1980s, Ottawa was awash in debt, but average citizens were not — in fact, in 1982 the average savings rate in Canada hit 20%, its highest point ever. Two and a half decades later, the government is in the black, but Canadians are saving next to nothing. The turnaround is not a coincidence. Governments have downloaded extra costs on us in the form of higher taxes and fees. We may never again be able to save 22% of our incomes, but even a modest decrease in our taxes would help us boost our anemic savings from their current level of around 3% of earnings.

Canadians also need to start seeing meaningful wage gains again, as we did between 1950 and 1980 when household income more than doubled in real terms. Dufour suggests that a rise in the minimum wage could have a ripple effect through all income levels. Additionally, he supports easier access to Employment Insurance to encourage workers to be more vocal in demanding pay increases. At the moment, says Dufour, Canadians “look behind them and see there’s no social safety net, and so they’re willing to work for less.”

If those proposals strike you as too militant, it’s difficult to argue with another notion — giving all Canadians an affordable way to save for their retirement. Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, is proposing a national supplementary pension system that would act as a top-up to Old Age Security and the Canada Pension Plan. It would automatically cover the estimated 10 million workers who don’t have a company pension plan and allow them to direct their savings into a supplementary plan that would save and invest their money at minimal cost. “Canada does look after their working poor relatively well in their old age, and the rich do a good job taking care of themselves,” says Ambachtsheer. “So we’re strictly talking about income replacement for the middle class.”

These ideas are just starting points in what should be a national debate over how to increase the wealth of average citizens. Fixing the decline of the middle class won’t be easy, but it’s vital to our nation’s health and sense of social justice. For 25 years the middle class has had a raw deal. What we need now is a new deal.