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Most workers living ‘close to the line:’ survey

It's no secret that many Canadians are living paycheque to paycheque.

In fact, a recent survey by the Canadian Payroll Association found that 57 per cent of working Canadians polled reported they would be in difficulty if their pay were delayed by even a week. For workers aged 18 to 34, the number jumped to 63 per cent, and for single parents it climbed to 74 per cent. Clearly, a majority of Canadians have very little disposable income to throw around.

Still, even those of us with only a small amount of extra cash wonder if we should be taking some of our weekly pay and earmarking it for investments. If you only have a little money to spare, should you still be putting some of that in the stock market?

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The answer is almost always no, says Danielle Park, portfolio manager, blogger and author of Juggling Dynamite : An Insider's Wisdom on Money Management, Markets, and Wealth That Lasts. Ms. Park helps manage millions for more than 200 of North America's wealthiest families at the independent investment counsel firm she co-founded, Venable Park Investment Counsel Inc., in Barrie, Ont. Ms. Park says that households with very little money to spare should focus on improving their income stream and reducing debt while staying away from risky investments.

"I constantly tell people, don't talk about investing in things like stocks until you have got your income stream set up, your education covered and your housing paid off," she said. "That's the opposite of what most people in the money business do because they're trying to get people to give them assets. Some of them even recommend that people mortgage their house to give them assets, which is completely crazy and it's totally self-serving."

Ms. Park says that although cash-strapped Canadians may be tempted to take advantage of record low interest rates to borrow more money, they should be using those rates to get themselves out of debt.

"There's some people who would say, rates are low why wouldn't you borrow? I say rates are low, so why wouldn't you get the debts paid off as fast as you can?" she said. "So if a five year mortgage rate typically in Canada is 8 per cent and right now it's 3 per cent, that is a huge gift to this generation and I think it's not stressed enough."

Bruce Sellery, journalist, businessman and author of Moolala : Why Smart People Do Dumb Things With Their Money (And What You Can Do About It), agrees that no one who is living paycheque to paycheque should be investing.

"You have bigger fish to fry," he said. "In most cases, people in that situation have consumer debt. That needs to be cleared before investing, largely because of 15 to 25 per cent interest rates. Instead of investing, you need to focus on a sustainable spending plan."

Mr. Sellery lays out that sustainable spending plan in three components: a) Analyze cash flow, b) Brainstorm ways to change it and c) Commit to making two to three changes that will have the largest impact. These can be large changes, like getting rid of a second car or getting a second job, or smaller changes that curb your spending habits. Once you are able to generate a surplus and pay down your consumer debt, says Mr. Sellery, you can get to investing.

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Ms. Park suggests that if you've got a secure, substantial income stream, you've gotten rid of any non-housing debt and have set up an aggressive mortgage payment plan, you might want to use your RRSP deductions for the tax-savings benefits. However, in her opinion, you would be better off parking your money in GICs rather than diving into stocks or bonds because of the current volatile investing environment.

"Stocks are highly overrated as an investment tool, they're highly oversold to people, they tend to have tonnes of fees attached in the way that they're packaged," she said. "There have been some buying opportunities that came along like the bottom in 2003 and the bottom in 2009 but most of the time, stocks have been overvalued and still are today. You could have sat out of the stock market entirely for the last 12 years and be further ahead if you'd have just used GICs at your local bank."

Because many people in the financial services industry only get paid if they have their clients' assets out of cash, Ms. Park says people should be wary of banks or advisors trying to sell them risk products. "Capital is hard to get and you have to really defend it."

"We've probably got another five to seven years of these kinds of challenging conditions, but if you're not getting wiped out every two years, who cares? That doesn't mean one can't build up their nest egg now," she said. "What you're trying to do is amass that liquidity, that pool of money so that when we get to a point where you are debt-free and you have a little more risk tolerance, you will get the opportunity to put that some of that capital to work. We will get that opportunity and probably within not too many more years, just not yet so as long as you understand that, you can really get ahead here."

In terms of how much you should be saving, Ms. Park says a "very normal" savings target is 10 to 15 per cent – a rate that was the norm back in 1980. To make that happen, Ms. Park suggests households put together a budget. "Factor in all the stuff you love to do and then see how much that is a month and set a target of a forced savings plan," she said. "If your cash flow is sufficient to cover your budget, then set up another forced payment as if it was a car payment and target 10 or 15 per cent of your income and it'll build up over time."

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