What we’re seeing today in the economy is happening faster and hitting harder than anything most of us have experienced before.
That’s the main reason why almost everyone’s finances have been hurt in the pandemic through job losses or decimated investments. But we haven’t helped ourselves as much as we could have. After a decade of economic stability, we got a bit sloppy in some of our personal-finance habits. Here are some examples of ideas about money that no longer make sense.
Your line of credit is your emergency fund
One of the top prepandemic fallacies of personal finance is that interest is your reward for saving and, if interest rates are low, there’s little point in keeping money in a savings account. Instead, access money when you’re in need from your home equity line of credit, or HELOC.
HELOCs are a smart way to borrow for the short term because they carry very low interest rates – commonly about 2.95 per cent these days. But Canadian households are carrying a lot of debt these days. Piling on still more debt to weather a layoff is last resort, not a go-to strategy. It’s better to have savings, even if the interest rate is weak.
The prime focus of saving should be retirement
A U.K. government-run pension provider, the National Employment Savings Trust, has done something really smart in offering a “sidecar” savings option that allows people to put money into an emergency savings account while also saving for retirement.
When we talk about long-term saving in Canada, the context is mainly for retirement. The pandemic has reminded us of the importance of saving for emergencies as well. When things calm down, we should think about a savings recalibration. Instead of $100 into retirement plans, how about $75 to retirement and $25 for emergencies?
Savings-account TFSAs are for losers
People with tax-free savings accounts based on high-interest savings accounts have been mocked for their timidity and unworldliness. Why waste the tax-free aspect of TFSAs on interest of no more than 2 per cent or so when you could be using it on stock market returns quadruple that or more?
But the worst that can happen with a savings-account TFSA is that your interest rate declines. As long as you stay within deposit-insurance limits, your principal and interest earned are safe.
Crushing mortgage payments are a normal part of home ownership
Pushing your finances to the max to buy a house seemed to make sense when interest rates were low, the job market was strong and, most importantly, house prices were rising steadily. But taking as much money as the bank will let you have means you have almost no ability to cope with a loss of income, particularly if you have kids and car payments.
A better rule for the future: Buy as little house as you can get away with.
Using debt to finance consumption is normal
It’s pointless to rattle on about good debt (for investments that add to your wealth) and bad debt (for stuff you consume and that adds nothing to your net worth). Beyond the usual mortgage, paying for university or investing in a business or other assets, few of us can live a life of debt abstinence.
Where we’ve grown sloppy is in discerning the difference between the special, infrequent moments in life that warrant us going into debt and the use of debt as a supplement to regular lifestyle spending. A more discriminating approach to debt would make us more nimble in the next economic downturn.
Spending big on a vehicle is normal
The most egregious form of excessive debt is the car loan. The average monthly payment on a new vehicle loan was $696 in February, the data analysis firm J.D. Power has reported. Meanwhile, 56 per cent of new vehicle loans were spread over terms of 84 months and more.
These car loans might be the biggest dead weight in all of personal finance. Owning cars and trucks helps the Canadian economy and keeps your family on the move. But average car payments of nearly $700 are an extravagance you may want to put the brakes on.
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