Falling gasoline prices offer a chance for some personal finance redemption in 2015.
As a country of confirmed borrowers, we need it. It's now obvious that as long as interest rates stay low, Canadians will continue to wallow in debt.
For every good bit of news on debt, there's an offsetting piece of bad news. We've seen data showing people are smartly paying down their mortgages, but also a surge in car loans. Bottom line, the ratio of debt to household income was at record highs in the third quarter of 2014.
Thanks to falling gas prices, you're saving money every time you fill up your car or truck. But are you actually saving it, or are you spending it like found money? It's by putting our gas savings in an emergency fund, a retirement fund or a child's registered education savings plan that we redeem our borrowing excesses. Spending the money on a better cable package or more restaurant dining is a blown opportunity.
BMO Capital Markets economist Sal Guatieri estimates that households would save almost $1,000 a year if the 35-cent-per-litre decline in gas prices over the second half of 2014 is sustained. It very likely won't be. The decline seems too extreme for it not to be reversed to at least some extent. So let's figure on a little more than half that level of saving on gas for next year, or $600 a household.
That's $50 a month, which sounds puny. But at a time when debt levels keep expanding, a lot of us need to make even a modest attempt to do better as savers. Here are some ways to use your savings on gas, starting with the most urgent:
1.) Eliminate your credit card balance
When you're paying interest rates of close to 20 per cent on a card balance, hammering it down to zero is your top financial priority, period. Forget about investing in tax-free savings accounts and registered retirement savings plans. There's no way you generate returns in them that are even close to what you're paying on card interest.
2.) Build your safety net
We need a new phrase to replace "emergency fund," which sounds too vague and old-fashioned. A safety-net fund covers any unplanned expenses that you can't cover out of your regular household cash flow. Think of expenses ranging from the ordinary – you unexpectedly need new tires for the car – to catastrophic events such as a job loss or major illness. Having $600 in your emergency fund one year from now may not be a difference maker, but it's a good start. Guarantee: You will never say, "Damn, I wish I didn't save that $600."
3.) Build a registered retirement education savings plan
RESPs are Canada's most neglected savings vehicle. In the Yconic/Abacus poll of millennials that was widely covered by The Globe last spring, just 46 per cent of participants said their parents used RESPs. Parents, today's tough job market for young people makes it harder than ever to get student loans repaid in a timely manner. Help minimize those debts by investing in an RESP. A $600 RESP contribution over a year would generate $120 in matching federal grant money. That's enough to cover books and supplies for at least one semester of university or college.
4.) Save for a house
Retirement saving would ideally appear in this slot, but people in their 20s and early 30s won't get into big city housing markets unless they bring all their savings power to bear on a down payment (let's assume student debts are fully repaid). Saving an extra $600 annually for a few years will help you borrow a little less on your mortgage and thus reduce the amount of interest you pay over the course of your mortgage.
5.) Retirement
Here's where that $600 a year amount starts to really add up. Over 20 years, annual contributions of that amount would be worth $20,832, assuming an average 5-per-cent growth rate.
For the past several years, Canadians have been finding room in their budgets to increase borrowing above and beyond the amount that their incomes are rising. It seems hopeless getting Canadians to carve out room for saving, but fortunately we don't have to as a result of falling gasoline prices. Take advantage and redeem your finances in 2015.
Globe app users click here for a chart showing gas savings
Rob Carrick