Paving the road to financial security
Posted Nov 27, 2009 By Lorne Cutler
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Tweet ThisEMC Lifestyle The Canadian economy has been in recession since mid-2008.
Though the Canadian government has recently declared that there are early signs that we are coming out of recession, the situation for many Canadians is not so rosy and job security is still a major concern.
While the Ottawa region has probably been spared the worst of the recession, workers in the private sector who have been able to hold onto their jobs are now questioning the long-term viability of their pension plans. Those with little savings are wondering how to get by from month to month.
The recession has forced many Canadians to closely examine how they handle their financial affairs.
For far too long, too many North Americans have lived beyond their means. Instant gratification has become the norm.
While our western consumer lifestyles were sustainable as long as they were financed by savings or a moderate level of debt, as we have come to learn, too much debt is a dangerous thing. Debt acquired for current consumption may sustain an economy and individual households for a period of time but eventually unsustainable debt will only consume the debtor.
Governments may have an extended capacity for deficit financing, individuals do not. The key to personal financial health is a proper balance of personal savings and prudent spending. Spending money we don't have may ultimately lead to personal hardship and possibly bankruptcy. If we are to survive the current economic crisis and have financial security, then we must start living within ours means.
Unfortunately, too many of us have forgotten how to do this or are just learning how.
During the 1980s, Canadians saved 10% of their after-tax income. By 2008, Canadians had a negative saving rate. Even Canadians with strong employment incomes often have little investment income and lots of available RRSP room.
Saving has come back in vogue. Canadian savings rates increased to 4.7% by late 2008. Only time will tell if we are witnessing a real sea change or whether Canadians will resume their old ways once the recession is over.
Some politicians and economists have tried to tell us that for the recession to end consumers need to increase their spending. Our first priority, however, must be to get and keep our own personal financial house in order. If we go back to our previous spending and debt habits, the recession will never end.
Many factors influence why and how we save. Our parents and grandparents would save with a goal in mind, whether it was to purchase a home or car, raise a family or for retirement. Those who went through the Great Depression and the Second World War sought to create a better life for their children.
Immigrants, even with lower incomes, often save more than native-born Canadians because they want to create a better future for their children.
For whatever reason, the boomer generation has largely been a generation of entitlement and instant gratification and this spirit has been passed on to its children.
The first rule of savings is to pay yourself first. This means that before you budget money for your everyday expenses, you need to first put aside money for savings, be it for RRSPs or non-registered savings.
In order to be comfortable with saving, however, it is necessary to know and follow the tricks for spending less.
Spending less doesn't mean doing without. It means knowing how to find bargains, how to negotiate price, knowing when something is not a good deal and being able to modify expectations.
Over the coming months, this column will explore the tools required to properly budget and monitor your money.
As well, future articles will focus on how to save money in all aspects of spending from grocery shopping and travel to personal transportation and lower cost ways of money management. With a proper understanding of your personal finances, it is possible to have sufficient savings to weather any storm.
Lorne Cutler is an independent financial advisor and can be reached at lacutler@hotmail.com.
