New rules of saving

Don’t save for a rainy day. Here’s why

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From the November 2016 issue of the magazine.

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personal finance

Rainy day savings accounts are a bad idea

In this new age of low interest rates, rainy day savings make a lot less sense. It’s hard to justify keeping six months’ salary in a plain-vanilla account. “If you have a mortgage, money in a savings account is better spent putting it towards the mortgage,” says Dan Bortolotti, MoneySense columnist and certified financial planner with PWL Capital in Toronto. As well, if you have a mortgage, an equity line of credit on your home makes sense. “Just ensure you get the equity line of credit approved while you’re employed,” says Bortolotti. A word of caution—only tap the line of credit in a real emergency. It’s tempting to dip into it for impulse buys like a new car or trip to Vegas. “You have to avoid that,” says Bortolotti. And if you don’t have a mortgage? Then you likely have money sitting in either a TFSA or RRSP. Simply put a portion of the TFSA money in investments you can access quickly in a pinch—say, if the car needs engine repairs or your home needs a new roof. The trick is to keep $20,000 or so in your TFSA invested in some form of liquid funds (but not GICs as they’re often locked in for a year or more). Your money will get better returns while allowing you to scoop it out easily when you really need it.

Debt is not always #1 on your hate list

The idea of good debt versus bad debt still holds. But if your debt is a manageable amount, if it is being used to purchase good investments such as stocks that will grow your net worth in the long term AND if you’re not stretching the household budget to do it, then debt is okay. “Investing in a home or your education is also a good use of debt—but the education debt has to be thoughtful debt,” says Vickie Campbell, a certified financial planner with Ryan Lamontagne in Ottawa. “In any case, if you borrow money to invest in property, stocks or your education, you need to have a long-term, actionable investment strategy in place so the money is not simply wasted,” says Campbell. What else does that mean? Having a plan to pay off your debt. “Sure, interest rates are low but paying even a small bit of interest each year adds up over the long term,” says Campbell. So borrow, but borrow with a purpose.

Saving 10% of your gross income doesn’t add up

In most cases, saving 10% of your gross income every year isn’t enough to guarantee you a good retirement. “This was never a good savings rule, because the amount you need to save varies according to your income,” says Dan Bortolotti, a certified financial planner with PWL Capital in Toronto. Sure, if you have an annual gross income of $50,000, then saving 10% is probably enough to guarantee you a comfortable retirement. That’s because CPP and OAS will make up a big chunk of the $50,000-a-year income. “But if you earn $150,000, you should be saving a lot more than 10%,” says Bortolotti, who says 20% or more may be required. So as your income grows over the years, the amount you save in dollars will likely grow and so should the amount you save as a percentage. Once you reach the empty-nester stage and mortgage payments and kid-related expenses are gone, saving becomes easier. But with longevity playing a larger role in financial planning and with interest rates and equity returns tracking much lower, “it’s best to have a financial plan that will take all of these changing variables into account,” says Vickie Campbell, a CFP with Ryan Lamontagne in Ottawa. “One size no longer fits all.”

Busted: Budgeting

Psst! We’ll let you in on a secret—you don’t have to budget every cent you earn. The only people who should be keeping a spread sheet of their spending—or a journal tracking every nickel and dime—are the ones who have no idea where their money is going. Top-down budgeting works best for most people. That’s where you figure out, roughly, what you are spending monthly. Then, you set up an automatic savings plan (either through your bank or employer for stock plans and pensions) and then simply spend the rest. So set your savings goal first—say 15% of gross income—and then you’re okay just spending what’s left. “Not everyone will be capable of doing this,” says CFP Dan Bortolotti, “but if you’re even slightly disciplined, you should be okay.”

The new rules of personal finance:

The new rules of spending »
The new rules of investing »
The new rules of retirement »

One comment on “New rules of saving

  1. Absolutely believe that everyone should “Track” their expenses and know where every cent of your money goes. (What you save should be tracked as an expense too) There’s lots of available software programs that can help. Here, we’ve tracked for many years and we still do so in retirement .. just can’t get away from the ‘discipline of knowing’.

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