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Another rule of thumb that Patel says is no longer valid is the idea that “housing costs shouldn’t be more than 32 per cent of one’s gross income.”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!

By Sheryl Smolkin

As I write this on March 31st, it is for the second time because I closed the completed document the first time without saving it. I can only attribute this oversight to an early April Fools’ Day joke from cyber space!

Here are some interesting blogs I read this week:

For those of you who prefer cash back credit cards over travel cards, Tom Drake on the Canadian Finance blog rates the Best Cash Back Credit Cards of 2015. Top of the list is the Scotiabank Momentum VISA Infinite Card which offers a full 4% cash back on gas station and grocery store purchases. You also receive 2% cash back on your recurring payments and on drug store purchases. All other purchases earn a 1% cash rebate. 

The Big Cajun Man aka Alan Whitton writes on the Canadian Personal Finance blog about his daughter’s experience trying to find a student line of credit to attend Chiropractic College. The only financial institution willing to fork over enough money was the National Bank of Canada. However, by mistake they set up the loan as a personal line of credit. As a result, the very next month there was a demand for payment. Although the error was fixed, Whitton had to co-sign on the loan.

Five unconventional ways to get your financial act together from Kerry K. Taylor aka Squawkfox resonates with me. She suggests we can save money by throwing out fewer grocery products and curbing our collecting. We just renovated our kitchen cabinets and I couldn’t believe the number of stale-dated packages we pitched and how many marginally useful kitchen gadgets we have collected. Did we ever really need  six sets of barbecue skewers?

Why “Healthspan” trumps “Lifespan” by Dan Richards is a guest blog on the Financial Independence Hub. Financial advisors spend a great deal of their time with clients who ask, “Will I run out of money?” But Richards says according to new research, an equally pressing question is “How can I enjoy life in my 60s before health issues creep in.?

RRIFs 101: Using your nest egg by Preet Banerjee on Tangerine’s Forward Thinking blog fills in the blanks for readers who understand how RRSPs work but were not aware that they must be converted into RRIFs at age 71 and that beginning the year after, minimum fully taxable amounts must be withdrawn.

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 with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.