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12 ways to build wealth in 2012
Rob Carrick
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Rob Carrick spotlights a dozen personal finance and investing themes that will be at centre stage in the months ahead
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Cash is trash
You’re making, what, 1.5 or 2 per cent on the money in your high-rate savings account (or less if you’re not paying attention)? Keep some cash safe and sound for emergencies, but if you’ve got lots it’s time to find better ways to use it. Pay down debts or invest it in the markets for the long term. Keep your money safe and you end with an after-inflation loss of 0.9 to 1.4 per cent, according to the latest cost-of-living numbers from Statistics Canada.
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Don’t drink the housing market kool-aid
The affordability gauges used by the banks – i.e., people who make money selling mortgages – are too slack. They let people buy more house than they can comfortably afford while meeting their savings obligations. If your mortgage and all your monthly debt payments would exceed 30 per cent of your monthly pretax income, then back off and keep saving. Worried that the price of houses will keep rising and you’ll never be able to afford to buy in? Won’t happen. When people like you are priced out of the market, the market must fall.
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Couple eating pizza in new apartment
Explore your inner renter (Generations X and Y edition)
This is already starting to happen in the United States – young adults are postponing home ownership and instead renting for longer. Frankly, there’s a good argument for buying houses in U.S. cities because of rock-bottom prices. But young adults realize that mobility is an asset when looking for a job. Plus, they’re marrying later and often carrying big student loans. Renting makes sense in this context, as long as you’re saving the money you’d otherwise be spending as a homeowner.
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senior couple sitting in front of their house
Explore your inner renter (Baby Boomer edition)
Enough with property taxes and those never-ending maintenance costs, not to mention condo fees. If you’re a retiree selling the house where you raised your family, think about renting your next home instead of buying.
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The pay-more-get-less decade is upon us
The subtext of almost every bit of news about government finances these days is that the status quo is unaffordable. We haven’t yet seen the trickle-down effects, but we will in federal, provincial and municipal budgets in the decade ahead. Expect user fees for public services that are now free, as well as special levies and outright tax increases.
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Brace for the debt reckoning
Borrowing costs will increase eventually and turn light debt loads into bone crushers. That you probably know already. The less understood impact of high debt loads is inadequate saving. The cost of borrowing is diverting money away from your registered retirement savings plan, registered education savings plan and tax-free savings account. The junk you’re buying now will not pay for your retirement or help your kids with university costs.
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Forget about high returns and low risk going together
Conservative investors are choking on the low rate paid by bonds, term deposits and high-rate savings accounts, and they’re open to higher-yielding alternatives. Unfortunately, there are none if you place great importance on not losing money. Dividend stocks? They can fall hard (reference: bank stocks in 2009). Covered call ETFs? If you can’t explain to a 12-year-old how they work, they’re out of your league.
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Count your fees
So many smart shoppers, and so many dumb investors. Why can’t we apply the same shrewdness we apply to buying cars and groceries to our investments? Don’t obsess about the amount of fees you’re paying to advisers and to investment companies. It’s all about value for the dollar. Are your funds delivering competitive returns? Is your adviser advising? Don’t stop investigating until you have a yes or no answer.
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Spare a thought for the young
Canada’s population is aging quickly, which means the needs of seniors will dominate the national agenda. Meanwhile, young Canadians face financial challenges like soaring tuition costs, weak job markets, expensive housing and rampant consumerism. If you’ve done well financially, be a money mentor to a young person and help them make smart financial decisions.
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Seek help where needed
Financial planners, debt counsellors and accountants all know more than you do about money. Remember that if you’re a do-it-yourselfer who is doing yourself harm.
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Be an internationalist
The global economy is slowing, and that should undermine demand for the commodities that drive about 47 per cent of the Canadian stock market. Markets in the United States, Mexico, South Korea, Britain, Switzerland and Australia have all done better than Canada this year.
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Patience, patience
Things will probably get a bit worse in the global economy and here in Canada before they get better, but a permanent state of dread about investing is uncalled for. It’s just as destructive as irrational exuberance.
