HBO’s Bill Maher was on-point in the New Rules segment of this past weekend’s season premiere. “To me,” he said, “the real lesson of this government shutdown is that we found out that federal workers – quintessential middle-class jobs – can’t afford to miss one paycheque.”
No doubt that line resonated with more than a few Canadians. New data from the MNP Consumer Debt Index, a quarterly study conducted by Ipsos, shows that almost half (46%) of adult Canadians are $200 or less from insolvency at the end of the month. Almost a third (31%) say they can’t pay their bills.
Both results are up significantly over the September report. At that time, 40% said they were that close to going broke at month-end and 24% reported having difficulties paying their bills.
“Many have so little wiggle room that any increase in living costs or interest payments can tip them over the edge,” says MNP Ltd.’s president Grant Bazian. “For most, the cause of trouble appears to be long-term accumulated debt. … They just can’t carry it any longer at higher interest rates.”
Much has been written about the value of an emergency fund. Recommendations vary, but it’s not uncommon to hear professionals suggest three to six months in savings for a rainy day. What’s most important is that you make decisions based on your own ability to save and your current financial situation.
If you might lose your job this year, factor that in. How much severance are you likely to receive? The standard benchmark is one month of pay for every year you’ve been with the company, but you can’t count on that.
How much money do you need to get through the month and how long do you think it will take you to find a new job. It’s not uncommon for middle-managers and executives to be out of work for six months, a year or even more.
If consumer debt is piling up, pay that down as quickly as you can. Identify the rate of interest you’re being charged by each of your lenders, and pay down the highest interest rate debt first.
I’m going to do my best to help Canadians understand what’s happening in the economy – at home and around the world. I’m not here to sell you anything. I have no agenda beyond wanting to help readers understand the world just a little bit better so that they can take care of the ones they love.
A bit about me. I’ve been writing about economics, household finances and retirement planning since the mid-1990s. I was a journalist initially, and then joined one of the country’s top insurance companies as a marketing/communications leader. Both experiences taught me the value of learning and the feeling of confidence that comes from having even a rudimentary understanding of how money works.
You’re going to see a few key themes covered in this space:
Expect a recession sometime soon. This year marks the 10th consecutive year of economic growth in Canada. Yes, we’ve been mired in an extended period of slow growth since the financial crisis. Just the same, we’ve seen positive numbers every year since 2009. That’s not normal. The C.D. Howe Institute reports that economic expansions have averaged about half a dozen years each since The Great Depression.
Interest rates matter more than ever. Low rates began to emerge as an issue for long-term investors in the 1990s. But that was nothing compared to the super-low rates implemented by central banks around the world to spur growth after the financial crisis. The Bank of Canada announced today that it will maintain its target for the overnight rate at 1.75%. Like other central banks, they’ve been working to inch that rate up. (Canada’s key rate hit a low of 0.5% in 2009.) But they have to tread carefully. Rising rates slow economic growth, so of course the risk is that they will tip the economy into recession. But if/when a recession does occur, central banks need to have room to lower rates in order to help the economy recover. You can’t do a lot of cutting when your starting point is less than 2%.
Navigating all this means understanding risk. That goes beyond traditional investment risk. Canadians are living longer than ever. That means longevity risk, which is to say that you might outlive your savings. In a connected world where government decisions often have global implications, political risk is significant. Canadians who invest in the U.S. market are well aware of currency risk. There is much to consider.
All of this is affecting how Canadians plan for the future. That’s especially true for long-term savings goals like retirement. Don’t be surprised if you’re still working at 70. And don’t be put off by that. It may be the best thing for you.
More than ever, it’s up to you and me. Employers have been stepping back from the old-school, paternalistic approach they’ve historically taken with retirement, life and health insurance benefits. Much has been written about the move from defined benefit to defined contribution pensions for example, which puts the onus on individuals to make investment decisions. The discontinuation of retiree benefits is another big story. It’s not clear how this will play out as baby boomers continue to enter retirement. Few expect governments to fill the gap, but it’s too early to make bold predictions on that. Obviously though, we have to be prepared to take care of ourselves to an extent that our parents weren’t required to.
If you’d like to see something covered, please shoot me a note. And if you know someone who will value Today’s Economy, please share.