Runaway cost of living, debt raises questions over traditional `rules of thumb’ for money

Writing in The Globe and Mail, Saijal Patel notes that inflation and the related higher cost of living are driving people’s money concerns — and calling old rules of thumb for handling the money into question.

In her opinion column, Patel, who leads a financial consulting firm aimed at “empowering women’s financial independence and security,” says she’s noticed a shift in people’s priorities from “investment strategies and retirement planning, to now finding ways to maximize limited resources and preventing overwhelming debt.”

“There’s a prevailing sense of hopelessness in achieving financial goals,” she writes. 

Citing a recent Worry Poll from the Bank of Nova Scotia, Patel reports that “73 per cent of those surveyed had high levels of concern over the rising cost of living.” Leading topics that induced stress included “paying for day-to-day expenses (44 per cent), paying off debt (39 per cent) and saving for emergencies (38 per cent).”

This new reality of money worries tends to throw accept “rule of thumb” solutions into question, Patel writes.

“Take for example, the 50-30-20 rule in budgeting that many personal financial experts tout. It recommends that 50 per cent of your net income go toward living expenses and essentials (needs), 30 per cent toward discretionary spending (wants), and 20 per cent toward savings (emergency funds and future goals),” she notes.

However, she continues, if you do the math, this idea doesn’t work very well.

“According to Statistics Canada, the median after-tax income for households was $73,000 in 2020. Based on this, no more than $36,500 or $3,041 per month should be allocated to one’s essentials. Yet the average monthly rent in Canada stands at approximately $2,000 (rising to $3,000 in the Greater Toronto Area), and the average monthly grocery bill is $1,065 for a family of four.”

This makes the 50-30-20 rule “unattainable for the majority of Canadians,” Patel concludes.

Another rule of thumb that Patel says is no longer valid is the idea that “housing costs shouldn’t be more than 32 per cent of one’s gross income.” (Our late father used to say it should be 25 per cent — but that was about 50 years ago, and things have certainly got more expensive in the intervening years.)

Patel cites the National Bank of Canada’s recent Housing Affordability Report as saying that “the average Canadian would need an annual income of $184,524 to purchase a `representative home.’” That, Patel notes, is more than twice the median after-tax income figure she cited earlier.

Along with high housing costs, Patel cites high taxes as the two most expensive things for Canadians. Taxes, she argues, are not something individuals can control.

Patel concludes that “financial education is the key if we are to ensure individuals, and collectively, our society, is prosperous.”

This is a thoughtful article. When we think about our parents buying a fairly big house in the ‘burbs for $23,000 in the mid-1960s, a house valued at close to $1 million today, you can really see the impact of inflation over time. One has to ask if wages are keeping up with the cost of living — it sure doesn’t seem like it.

Living cheque to cheque is a reality for many of us, but we have to all remember that a day will come when a paycheque doesn’t — and you’ll be retired. Yes, budgets are squeaky tight today, but if you can save even a small amount each month for retirement, you will be taking a lot of money pressure off the future you.

If you have access to a retirement program at work, be sure to take part as fully as you can. If you don’t, and you are saving on your own for retirement, take a hard look at the Saskatchewan Pension Plan. SPP is a do-it-yourself retirement program. You decide how much you want to chip in, and SPP does all the rest — professional investing at a low cost, growing your savings, and providing retirement income options when you punch out for the last time. Check out SPP today.

News flash — there’s no longer any SPP limit on how much you can contribute to the plan. You can transfer in any amount from your other registered retirement savings plans, and can contribute annually any amount up to your RRSP room limit. The savings possibilities are limitless!

Join the Wealthcare Revolution – follow SPP on Facebook!

Has pandemic “self-care” spending disrupted Canadians’ retirement plans?

It seems that we are starting to near the end of the pandemic, as economies across the country begin to slowly re-open.

But, according to an article in the Globe and Mail, there is concern that Canadians have been spending so much more money on “self care” in light of the pandemic that there may be little left for the retirement savings piggy bank.

The newspaper cites a recent Bank of Nova Scotia study that found “70 per cent of Canadians started partaking in at least one self-care activity during the pandemic, with 60 per cent of those spending an average of $282 in the past 12 months.”

By self-care, the Globe says, we are talking about “online yoga classes, baking supplies, $5,000 Peloton bikes and class memberships, $85 meditation apps, or meal delivery services that take the thinking out of dinner prep.”

While those approaching retirement spent the least on these categories, the Globe says younger people spent plenty. “Although they struggle to find the money for down payments on homes and families, even in good times, the Scotiabank survey found that Canadians 18 to 34 significantly outspent others (on) self-care activities in the previous year.” Their average rate of spend was $395, the article notes.

The article says that while it is understandable that people might spend money differently during the pandemic, it is important that they get back on track now that things are returning to a more normal setting.

“It’s still important for financial advisors to help clients stick to their bigger, longer-term financial goals like debt repayment and saving for retirement,” the article tells us.

Another poll, this one from the National Institute on Retirement Security in the U.S., points out that younger people already have obstacles in the way of their retirement savings plan. The NIRS media release is featured on the Le Lezard website.

In the release, NIRS spokesman Dan Doonan notes that “Generation X and Millennials are the first two generations that will largely enter retirement without a pension,” and states that it is not surprising they are anxious about their long-off golden years.

The research shows that 64 per cent of American Millennials and 54 per cent of GenXers are “more concerned about their retirement security in the wake of the COVID-19 pandemic.”

So let’s link these two ideas. Everyone is spending more on self-care, particularly younger people, due to the pandemic – but there are worries by younger people, GenXers and Millennials, about retirement security, given the lack of a pension at work.

If you don’t have a pension at work, you need to think about funding your own retirement. Government benefits are being improved, but currently deliver a fairly modest benefit. You have the power to supplement that future income by setting up your own retirement savings program. Take a look at the Saskatchewan Pension Plan – it offers everything you need for a do-it-yourself pension plan. You can set up automatic contributions from your bank account, or chip in lump sum amounts throughout the year. SPP will invest and grow your savings, and when you turn in your parking pass and security lanyard, SPP will help you convert that nest egg into an income stream. Check out SPP today, as the plan in 2021 is celebrating its 35^th year of delivering retirement security.

Join the Wealthcare Revolution – follow SPP on Facebook!

By Sheryl Smolkin

In late April the Globe and Mail’s Globe Talks series widely advertised a panel discussion called “Invest Like A Legend” hosted by Report on Business editor Duncan Hood and featuring speakers David Rosenberg, William J. Bernstein and Prett Bannerjee.

When Kerry K. Taylor aka Squawkfox read about the session, she immediately blogged her displeasure in A woman’s place is on a panel.“ She wrote, “Despite The Globe’s inability to ‘find’ a lady investing expert, both my Twitter feed and my inbox exploded with prospective panelists. So I made a binder — a binder full of financial women.”

Therefore, in solidarity with some of the terrific financial women I have met over the last several years as a personal finance writer, this week’s Best from the Blogosphere highlights some of their work.

In her blog Want to cash-out on your real estate? Read this, Lesley-Anne Scorgie says, “When times are good in real estate there are plenty of reasons to cash-out. But, the cash-out only works to your financial benefit if you’re actually putting real money towards your net worth…that does not mean selling an expensive property and using the equity to buy a less expensive property.”

Toronto Star consumer columnist Ellen Roseman documents changes to Tangerine Bank’s no-fee money-back MasterCard that she says “wowed so many Canadians eager for innovation.” She notes that barely one year after the launch, Tangerine MasterCard is raising fees and cutting benefits – a move many customers call bait and switch. For example, the two percent rebate on two categories of purchases remains. But the rebate on all other purchases dropped to 0.5%, starting April 29.

Cait Flanders, who has previously written about her one year shopping ban and extensive decluttering says it’s now time for her to embrace slow technology. While she acknowledges freely that social media has played an important role in forging her personal and business relationships, she has committed to:

• A 30-day social media detox (April 29th – May 28th).
• Figure out the role she wants social media to play in her life.
• Check/reply to email less often (also experiment with not checking on her phone).
• Figure out the role she wants technology to play in her life (phone, computers, TV, etc.)
• Read from a book every day

Jordann Brown, who blogs at My Alternate Life, recently shared her experience in How to Sell a Car in Canada as a Beginner. She researched how much her Volkswagen City Golf was worth and concluded she could sell it for much more than the $1,200 the dealership offered her when she bought her 2014 Subaru Crosstrek. She determined the car was worth $4,000, had the car professionally cleaned and did some small repairs. The car was advertised for $4,500 on Kijiji and after several days she happily accepted a $4,000 cash offer.

And finally, Jessica Moorhouse shares valuable information about banks and credit unions with free chequing accounts in Canada. You will not be surprised to discover that the list does not include the big five banks. However, Tangerine is now owned by the Bank of Nova Scotia.

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Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.