Some Canadians’ savings have been growing with limited opportunities to spend money on entertainment, travel, or big-ticket purchases since the pandemic began. But with the holidays and 2022 likely to bring more opportunities to spend, clients are turning to advisors to develop plans on how to allocate their funds most effectively and, in some cases, avoid the temptation to splurge.
Canadian households accumulated the highest amount of extra pandemic savings among G7 countries, according to data that the International Monetary Fund released in October. RBC Economics calculates that Canadians saved about $280-billion compared with pre-COVID-19 trends. A large portion of the savings sits in cash deposits.
Similarly, a Bank of Canada survey of Canadian consumers’ expectations conducted during the third quarter and released in October found that more than 40 per cent reported saving more than usual during the pandemic. In many cases, that was a result of reduced spending. Those who accumulated savings intend to spend about one-third of these funds by the end of next year and have already spent about 10 per cent of their extra money.
Wendy Brookhouse, financial advisor, money coach and founder of Black Star Wealth in Halifax, says many clients who accumulated extra savings have yet to allocate it because of ongoing uncertainty with the pandemic. However, they have been exploring their options for how best to use these funds.
She has been working with clients primarily around the decision of whether to put the extra money into their registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs).
Ms. Brookhouse says the decision comes down to contribution limits, their tax situations, the type of employer pension plan they have, and whether they already have short-term savings set aside for three to six months of expenses.
“I’ve been trying, where possible, to maybe prioritize the tax-free savings account if it’s bonus money,” she says.
“It helps them develop a greater pool of flexible money versus [an] RRSP, because while that’s a great tax-deferral method and it does help you in retirement, it’s not the most flexible pot of money.”
How to allocate making up for ‘lost time’
A big issue on the horizon to be conscious of, and one for which it may be harder to plan, says Ms. Brookhouse, is the “opening up” of further buying opportunities and clients’ desire to make up for lost time.
Namely, she expects travel to pick up in 2022 and holiday spending to increase if more people are allowed to congregate and entertain.
“We’ve been living in this really constraint-laden world, and when we get to that point where we can go and let loose, there may be this mentality of, ‘I deserve this, I earned this,’” she says. “So, there may be some kind of spending on different items, almost as a reward for getting through it.”
Ms. Brookhouse tries to help clients guard their savings against this situation by implementing a guideline in which clients aim to allocate a third of the funds to each debt, savings, and fun or discretionary expenses.
“That way, they’re allocating across the time spectrum and they are definitely increasing their net worth and financial health, but we’re also recognizing that it’s important that we have fun today.”
Retirement and gifting to family
Caroline Nalbantoglu, president of CNal Financial Planning Inc. in Montreal, says many of her clients also have amassed significant savings during the pandemic because of a lack of spending opportunities and, in some cases, from selling their secondary residences.
For some, she says, the extra money has provided an opportunity to gift to younger generations now. For others, it has given them the chance to set more aside for a larger buffer for retirement or long-term-care planning.
In either case, achieving a balance between gifting or spending the extra funds now versus saving for what-ifs has involved sitting down with clients to take a look at how their plans, expenses and cash flow have changed.
“I had to show them, ‘Okay, you can afford to gift so much to your children because you’re never going to use all this money,’” Ms. Nalbantoglu says. “Others just have this feeling, ‘It’s my money, I will definitely help out my kids, but I don’t want to start gifting to them now.’”
Focus on the long-term
Nicholas Hui, certified financial planner at Vave Financial Planning in Markham, Ont., agrees that projections within clients’ financial plans act as a compass to guide their decisions about how to best deploy the funds.
“If you can’t afford it in the long-term, then you probably should save it. But if you can afford it – maybe everything looks great – then you can spend it without feeling guilty,” he says.
The extra pandemic savings also offer an ideal chance to allocate funds to larger expenses that some may not have had cash for in the past rather than giving in to the urge to spend on a holiday or a big-ticket purchase after being restricted for so long.
“See this as your opportunity – the chance to start that TFSA that you didn’t get to start or the chance to put money into your kids’ registered education savings plan,” he says.
“Turn it around from being a splurge on yourself now to something that’s going to help you over the long-term.”