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household finances

A saleswoman shows a new car to a young family.

Now that former Bank of Canada Governor Mark Carney is crossing the pond, there are a few Canadians who are happy to see him go. They seem to believe that their poor savings habits are a result of his low interest rates.

It's true that the rate on savings is lower and the rate of savings has dropped. And it's true that $1,000 of monthly principal and interest repayments gets you more principal and less interest. But one has to wonder if monetary policy alone is responsible for our changing habits.

These days, car advertisements are less likely to show the manufacturer's suggested retail price than the monthly payments. Walk onto a car lot knowing that you can afford $500 per month in payments, and instead of looking at a cheaper model, you're presented with a longer amortization.

Whether we are in a high or low interest rate environment, saving money is a good thing and borrowing money for depreciating assets is a bad thing.

But with interest rates and inflation somewhat correlated, it's worth looking at just how much worse it could be for a saver in a low rate environment.

If you could get a one-year GIC paying 12 per cent when inflation is running at 10 per cent, $100 would grow to $112 before losing to taxes (a $4.20 hit at a 35 per cent tax rate), and then losing another $10.78 to inflation. The after-tax, real purchasing power of your money would have dropped to $97.02.

Today you can get a 1.9 per cent cashable one-year GIC and inflation is running below 1 per cent (but I'll use 1 per cent for now). The same $100 would buy you $100.22 worth of stuff one year later after factoring in the same 35 per cent tax hit.

So it turns out that saving money in a low interest rate environment isn't so bad compared to a high interest rate environment when we factor in inflation. At least not with this example.

Add in the recent introduction of the Tax-Free Savings Account to eliminate the tax drag and factor in the lower fees (or no fees) of bank account options today and being a saver is as attractive as ever, maybe more so.

But unless we're talking big amounts of money, small relative differences in after-tax real savings rates are not going to determine whether or not you're financially successful. Far more important is the simple big picture stuff. Like just saving money in the first place.

A renter faced with a $50 per month increase from their landlord is probably not going to move. After a few months, they might even have stopped complaining about the pinch on their money. We adapt to our financial situations, just like a $50 per month raise which starts as a $50 per month potential surplus quickly disappears.

Successful savers realize that they need to put themselves first on the list of people who need to be paid, not last. That's the simple, big picture stuff that determines financial success.

Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network. You can read his blog at WhereDoesAllMyMoneyGo.com and follow him on Twitter at @preetbanerjee.