A decade of strong gains in house prices and stocks convinced Canadians that saving money was pointless.
In just a few months, the pandemic has undone all that. The country that didn’t care about saving is expected to find religion in the months ahead. Economic forecasters think it’s possible that the percentage of disposable income left over after your usual spending could rise to between 10 per cent and 20 per cent from just 3 per cent or so.
The elevated savings rate is expected to persist after the pandemic fades, which is not great news for the economy because consumer spending is needed to reignite growth. But job losses and forgone income caused by COVID-19 offer a life lesson in the value of having savings to fall back on.
So keep saving, Canada. The mark of financial success for the next 12 months or so is going to be your ability to defend the savings regimen you adopted in the pandemic as best you can.
Something economists call the wealth effect explains why the savings rate fell so low before the pandemic. It starts with a hot housing market. Rising house prices make you feel rich and invite the use of a home-equity line of credit (HELOC) to tap into this paper wealth. More equity equals more borrowing room.
Add the bull market for stocks over the past decade, and you had wealth gains that persuaded people they were fine without putting money into boring old savings accounts earning 2 per cent to 3 per cent at best.
We now know the wealth effect is a mirage that fades when times get tough. One of the more surprising statistics to come out of the pandemic is that, according to the Canadian Bankers Association, more than 740,000 bank customers had either deferred their mortgage payments or used a skip-a-payment option as of mid-May. That’s about 15 per cent of mortgages held by banks.
It’s smart personal finance to use these deferrals if you lost your job and can’t pay your mortgage. But most setbacks in life don’t come with a safety net like this. You’ll need your own savings.
HELOCs can be a source of funds in an emergency, but you have to pay at least the interest on your debt every month, and the principal must be repaid at some point. Also, as highlighted in a recent column, banks can take your HELOC safety net away if they’re concerned about your debt level and income stability.
Part of the reason why saving is gaining momentum is physical distancing and the lack of opportunity to spend. But the economy is starting to reopen across the country, and that means some of the old spending temptations are coming back.
Give in to some of them. The economy needs us to spend. But if you don’t figure out a way to lock in some of your current savings habits, they’ll slip away on you in a hurry.
There are two types of saving in the pandemic if you’re fortunate enough not to have lost a job or income. The first is temporary saving, such as daycare. One reader told me this week that his adult son’s family is saving $2,000 a month in daycare.
Vehicle-related savings are similar – if you’re driving to work again, you’ll spend more on gas and insurance (if your insurer gave you a discount for low or zero use during the pandemic). Use your temporary savings for a goal such as building up your emergency fund, paying down your mortgage, car loan or HELOC, or adding to your retirement fund. Maybe save some for a nice vacation in the postpandemic world.
The second type of saving is the kind you should be aiming to continue when the virus is done. This is money you’re not spending now because you’re mostly at home and not out in the world – such as restaurant meals, live events, impulse purchases at the mall.
We’re not monks – we have to live and have fun. But the old savings rate of 3 per cent suggested we were having too much fun. A savings rate of 10 per cent or more can’t last, but let’s try to keep it going for a year.
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Rob Carrick