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Should Canadians spend or save?

The Bank of Canada tells Canadians to cut back spending and pay down debt, yet a rate cut is telling people to help the economy by spending more. What’s your client supposed to do?


Date: June 01,2015

To spend or to save? That is the question facing investors and their advisors today. For the last several years, the Bank of Canada has been warning Canadians about the amount of debt they’re taking on, while at the same time financial experts are saying that it’s spendthrift consumers who are spurring on the economy.

The BoC’s January rate cut mixed messages even further. Our current debt-to-disposable-income ratio sits at an all-time high of 163.3 per cent, with much of that debt related to mortgage loans. The rate cut, though, has now made borrowing cheaper – especially, for consumers, on mortgages and lines of credit – and that could encourage further spending.

Of course, when rates rise, all of that additional debt we’ve taken on will be harder to pay off, and that could hurt the economy, too.

It’s a confusing time for those Canadians worried about the country’s economic growth, which is struggling. On May 12, Moody’s Investors Services slashed its Canadian GDP target from 2.5 per cent in 2015 to 1.5 per cent. How can advisors help clients make sense of this and reconcile the twin realities of cheaper borrowing and rising debt levels?

Pay attention to your personal economy

While Canadians should be paying attention to the overall economy, when it comes to saving and spending, people should always look at their own situation first, says Peter Drake, vice-president of retirement and economic research at Fidelity Investments.

“It is equally, if not more important, to think of your personal economy,” he says. “Individuals need to think about their jobs and how they are doing, and whether it’s a good time for them to save or spend.”

Whether your client chooses to pay down debt or to spend money, any decision must be made with an eye on long-term financial implications, and people need to ask themselves how a future interest rate hike would affect their finances, says Mr. Drake.

“If it’s going to lead you to a more difficult financial condition, and if that means you have a sharply higher debt payment cost each month, then maybe you should think about paying down some debt,” he says.

As a matter of principle, one should spend within their means, says Cynthia Kett, a chartered accountant and certified financial planner with advice-only firm Stewart & Kett Financial Advisors in Toronto.

“We need to think about living for today and tomorrow. If we’re only living for today, we’re spending too much,” she says. “My opinion is that governments are taking on more than enough debt for all of us. Let’s not worry about the economy – we can only do what’s best for us.”

Canada’s spending and saving contradiction

While looking after oneself first makes a lot of sense, the reality is that if we all stopped spending, the economy would suffer, says Glen Hodgson, senior vice-president and chief economist at the Conference Board of Canada.

Personal consumption accounts for about 54 per cent of our GDP and spending, he says, and has a positive impact on short-term growth. If people quit shopping then we would see more cracks in our already fragile economy.

“Consumption growth is a major part of our economy,” says Mr. Hodgson. “People getting cold feet would have a depressing impact on our GDP.”

On the other hand, though, saving does help the economy grow long-term. When people invest it helps businesses expand, add jobs and buy and sell goods, all of which helps GDP growth. Without investment, Canada would become less competitive in the future.

While these do sound like contradicting messages, Hodgson points out that the reliance on spending is like the instant gratification you get from eating candy.

“Short-term spending is like being on a sugar high,” he says. “You’re coasting along on current consumption, but it’s saving that has the most long-term potential. You need to separate the short-term factors, which everyone focuses on, and the long-term ability to grow.”

With that in mind, spending versus saving comes down to a “very personal choice,” says Mr. Hodgson. Our growing debt loads will mean that a lot of people can’t spend, though others may be able to do both.

He suggests people run through the “what-ifs.” What if interest rates increased significantly? Could you still afford the payments? What if you’re considering a house, but prices keep rising? Can you carry a large mortgage payments for years?

“It comes down to an individual calculation,” he says.

Look at long-term savings

Statistics show that the need for saving may be greater now than ever before. Over the last three and a half decades, savings as a portion of disposable income have dwindled. In 2014, Canadian households saved about 4 per cent of their disposable income, down from about 16 per cent in 1981.

“When you look at these numbers, it’s not difficult to come to the conclusion that it might be better if consumers in general were saving a little more,” says Mr. Drake.

Plus, just as long-term saving is good for Canada’s economy, it’s also a positive for our personal economy. We might feel that “sugar high” when we buy something now, but we also need to invest in the market so we’ll have money down the road, says Mr. Drake.

Ultimately, people need to keep their temptations in check, be patient and be better prepared financially so that they don’t give in to those short-term impulses, says Ms. Kett. Advisors, adds Mr. Drake, can go a long way in helping people make sense of this spend-or-save world.

“Someone might be sitting at home looking at low interest rates and thinking this may be a great time to borrow money and buy something,” he says. “But if they talk to an advisor, they’ll focus on their overall financial picture. They’ll look at your consumption and savings - not just now, but where you’re going to be five years or 20 years down the road.”

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