Low interest rates have led many people to wonder if they should bother saving their money. While anemic returns on short-term GICs and savings accounts provide little growth, things aren’t as different from what some would have you believe were the “heyday” of higher savings rates.
Right now, the going rate on a one-year GIC (guaranteed investment certificate) from a big bank is about 1 per cent. Assuming a 35-per-cent tax bracket, an initial investment of $1,000 would grow to $1,010 by the end of the year, lose $3.50 to tax, and an additional $26.17 to inflation (currently running at 2.6 per cent). So this low-interest rate environment led to a decrease in purchasing power of 1.97 per cent overall and your original $1,000 could now only buy $980.33 worth of goods compared with what it could at the beginning of the year.
Back in 1980 interest rates were higher, but so was inflation. You could’ve picked up a one-year GIC for perhaps 13 per cent, while inflation was running at about 10 per cent. Assuming the same marginal tax rate of 35 per cent, an initial investment of $1,000 grew to $1,130 before losing $45.50 to tax. The remaining $1,084.50 then lost $108.45 to inflation to leave you with a decrease in purchasing power of 2.4 per cent. Your original $1,000 could only buy $976.05 worth of goods at the end of 1980.
Saving inside a registered plan, such as an RRSP or TFSA, negates the tax drag and since these tax-sheltered accounts are more prevalent than in the early 1980s one could argue that saving money now makes more sense than it did back then.
You can disregard the math though. From talking to people who I would consider financially successful, one of their common traits is that they have a grasp on a few, much simpler, money management concepts. One of those concepts is simply to be a habitual saver.
I know many individuals who are well versed in financial theory, read all the books, and who could quite frankly run rings around the average financial adviser with respect to knowledge of the nitty-gritty details of investing, but that doesn’t necessarily translate into financial success.
To be an investor, first you must be a saver.
Once saving is a habit, if you are still unhappy with the growth of your money, the low returns of safe investments can be exchanged for potentially higher returns with riskier investments, if you so desire. But until you are a saver, there’s no point in counting those chickens before the eggs have hatched, nor do you have to worry about putting all those eggs in one basket. Without savings, there are no eggs to begin with.