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By Jonathan Chevreau
National Post
Thursday, May 22, 2008 |
In the good old days when character traits like thrift and frugality were in vogue, "saving for a rainy day" was a common prudent response by families to the threat of future economic uncertainty. But even as an economic storm threatens North America, a poll released yesterday finds Canadians aren't concerned enough to put aside their high-spending ways.
Adrian Mastracci, “fee-only” portfolio manager at
KCM Wealth Management in Vancouver, says, "Too many Canadians are compromising their future prospects in order to fund current consumption."
Only 22% of us are saving more than we did before the economy slowed down, 43% are maintaining spending levels and 20% are spending more than ever, according to a new Accounts Habits poll commissioned by RBC. The online poll of 2,020 Canadian adult bank account holders was conducted by Ipsos Reid in March.
RBC senior vice-president Ashif Ratanshi says North America is in an economic downturn, so it should be "the time for Canadians to reassess their own finances and ensure they are effectively managing their money so that they can withstand any sudden pitfalls or changes in their lives."
RBC found 86% of Canadians are not saving as much as they would like. Less than half (49%) have a "rainy day" emergency account. Even of those who do, 55% have only one month's worth of expenses put aside, while 24% have three months set aside. Most financial planners specify three months as a minimum but six months and one-year cushions are far preferable.
RBC cites as "surprising" the fact 65% polled view credit cards or lines of credit as their emergency backup. More than one million Canadians keep at least $1,000 in a bank account each month and 60% of those consider that money to be their safety net.
An emergency cushion ranked only fifth of nine priorities, behind retirement saving, paying down mortgage or credit card debt and children's education.
That retirement savings priority is an odd one given that it consists of putting money aside for use decades down the road. As Stanley Kershman wrote in Put your Debt on a Diet, many Canadians may be just two paycheques away from bankruptcy. If they can't live without employment income for more than a few weeks, what are the odds they will be able to retire for decades?
Indeed, earlier this week the Coyne Partnership found many ageing Baby Boomers cannot afford to retire.
It found the number of American retirees will grow by less than 3% a year over the next two decades and could even fall to 1%. It said falling home prices, declining stock prices and rising health-care and energy costs means five million to 10 million fewer Boomers will be able to retire by 2017 than previously forecast, out of a total of 78 million Boomers in the United States.
Since Canadian savings rates are now negative, just like the United States, putting retirement savings ahead of emergency cushions is like putting the cart before the horse. For young families just starting out, debt management is more important than retirement savings, says actuary Malcolm Hamilton, worldwide partner with Mercer's.
Retirement savings have a long-term time horizon and are significantly invested in stocks or equity funds; that means RRSPs are not an optimal source of emergency funds (though many do draw down on them in a pinch, triggering tax to access the money). By contrast, short-term emergency cushions should be in easily accessible liquid cash, such as high-interest bank accounts, money market mutual funds or short-term bank GICs.
To build up an emergency fund requires spending less than we earn, but "we seem to have a savings malaise on both sides of the border," says Adrian Mastracci, president of Vancouver-based KCM Wealth Management Inc. Too many Canadians are compromising their future prospects in order to fund current consumption.
"I suggest the inability to save, coupled with the rising levels of all forms of debt now being incurred, will eventually catch up to us."
Mastracci says the retirement dreams of many may "already be in jeopardy. The medicine is going to be awful."
The medicine, as I have argued many times, is the rediscovery of thrift.
That means cultivating an attitude that is willing to delay present gratification in order to put one's future financial health on a sound footing.
Your grandmother had it right when she advised putting money aside for a rainy day.
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