Chilliwack – Bill Westmacott: is a Life Insurance broker in BC, and wealth solution provider.
Savings is not a sexy financial topic, but I would argue it is a very critical part of an overall wealth plan. I was raised in a middle-class home, where money was seldom ever discussed. So, launching into adulthood regarding financial stuff would be a school of many hard knocks. Intuitively, taking on debt was something I avoided, excluding purchasing used cars and buying our first home. Due to my aversion to debt, if my wife and I wanted to purchase something or go on a trip, we would save until we had sufficient funds. Did we manage our income perfectly? Of course not! Over several decades, I have honed my financial skills and disciplines, and I encourage you to do the same. Today, I want to share several critical disciplines/strategies I have learned about saving, and why having a savings strategy in multiple baskets is a significant part of achieving financial freedom.
Discipline # 1: It is vital to develop a simple budget to ensure you do not spend 100% of your monthly income. A budget has two components. Essential Expenses: savings, food/household, housing, clothing, insurance, and car or transportation expenses, cell phone, and internet, to name a few. Discretionary Spending: going out and entertainment, subscriptions, memberships, travel, etc. Many Canadians find themselves in financial trouble because they don’t track their spending and regularly overspend on discretionary items. I spent $700 at Starbucks in the last 30 days! What! (No, actually, I did not, but maybe $15). Do you really need two or three cars in the driveway, a boat, and a trailer you only use 3 times per year? To get your finances in order, you will need to make some tough decisions with your partner if you are married. The lack of financial discipline for many Canadians leads to serious conflicts and stress in relationships. It is far better to change your financial habits, rather than your partner (Far less expensive and painful). Yes, it does take work to change habits and accountability, but the long-term rewards will be amazing and freeing for your financial picture.
Discipline # 2: You must have a regular savings strategy that works for you. Some people will conclude that I do not have enough income to save regularly. You have three choices: earn more money (find a second job or start a small business). Two carefully examine all your spending and cut out the waste and non-essentials. Third, upgrade your skills to create a larger income and find something you will be passionate about. I have done all three many times in my life, and so can you. I will discuss several saving strategies shortly.
Discipline # 3: Another common hurdle to saving is carrying constant debt. Would you like to learn how to break the debt cycle in your life? Let’s say you honestly incorporate one or two of the above strategies (for example, you cut out wasteful spending, and you create a second income). Now you have $800 extra a month. What to do with it? No, you do not put 100% against your debt, but rather put $400 against your highest-interest-rate debt or the one you can pay off the quickest, and $400 into a savings plan. Why? Unless you start to build up savings, you will never break the debt cycle. Using this example, over the next 12 months, your $400 savings will grow to $4800. Wow! But what if you need new tires for your vehicle? No problem, you pay cash for them! Life is expensive, and stuff happens, but with consistent savings, you can slay the debt dragon and pay with cash.
Discipline # 4: Automate your savings each month or bi-weekly. Pretty much all financial institutions allow you to create an automatic payment or deposit into a savings account. Life is full of many commitments and distractions, so automating your savings ensures it gets done, and no one forgets. Second, I encourage you not to place your savings in high-risk investments. This money needs to be secure and safe when a real need arises. Savings should be a part of your defensive plan. I am not averse to higher-risk investing for a portion of your wealth, but that is not what savings are for. Consistent savings put you on the highway towards financial freedom and achieving many exciting goals. Next, we will cover several strategies and the best savings options.
Key Point: Savings need to outperform inflation; therefore, most financial institution savings accounts do not suffice. Many banks or credit unions only pay .5 %. Don’t get tricked into the 3 or 4-month promotions paying 4% or more, as they revert to 1/2% or so after the promo period. Many of the alternative or online banking institutions will pay 2% or more, which is still not a lot. You will need to research your options or discuss with an experienced financial professional who understands the importance of saving and options. I will explain a few options later in the blog for you to consider.
Strategy # 1: Start with an Emergency Savings Plan. Why? Well, because emergencies or unexpected expenses happen to all of us. And it does not matter what our social or economic status is. Cash is king, and having liquid assets is critical when setbacks happen. Back to our extra $400 a month, build up your emergency account until you feel comfortable. It could be $2500, $3000, or $5000, but the key is to have a defined amount. Why? Well, the emergency savings is just the starting point of your multiple savings accounts. Another important point. This account is not for non-essential purchases or your fun/goal account. So, when you have achieved your goal for the amount of your emergency account, I recommend celebrating with your next $400 on whatever makes you happy (a mini trip, an amazing dinner at your favourite restaurant, or just something special for you). Celebrate victories on the journey. In many cases, it will take multiple years to build your entire savings strategy of multiple accounts.
Strategy # 2: Open your second or third savings account with a purpose. With your emergency account in place, you can now reallocate the $400 a month into a specific new savings account or $200 into two accounts with different goals. Let’s say one account is for holidays/trips/family events, and the other is for a good used car or new furniture. As you eliminate one of your debts, there will be extra money, say, $200 per month. So add $100 to the $400 against your next debt reduction priority, and now you have $500 for savings each month. You will be amazed to see your debt shrink, savings grow, and your financial freedom increase! We currently have seven distinct savings vehicles: three savings accounts, a TFSA, RRSP, cash, and precious metals. Remember, building wealth is the result of a lifetime of good financial decisions and discipline towards financial freedom. So do not think it will happen in a couple of years. Think in years to decades without experiencing too many mistakes or setbacks.
Strategy # 3: Savings need to be understood in different time frames. Short-term, mid-term, and long-term. Short-term = immediate to several years. Mid-term = 5 to 15 years. Long-term = 15 plus years. Most of your savings should be liquid, except for possibly some of your mid-term or longer-term savings/investments in TFSA/RRSP/LIRA/IPP or PPP for business owners or professionals.
Let’s look at a few Short-term options: You will generally need to look outside the big banks and credit unions to find higher returns. One of my insurance carriers offers 1.85% on a high-interest savings account, which is 100% guaranteed and liquid with no penalties or fees. The challenge we face again is that central banks are lowering interest rates, and all savings accounts are based on variable short-term rates. As interest rates decrease, so do your returns. One strategy I have used many times is to add a portion into the high-interest savings account, and then use a ladder strategy with one and two-year terms. Example: $2500 in the HIS account, $1250 in a one-year term and $1250 in a two-year term. This way, you always have liquidity and new money available each year that pays higher interest rates (depending on deposit size, currently between 2.4% and 2.7% on a one-year and 2.55% to 2.85% on a two-year term). You can also consider money-market funds or short-term treasuries, EFTs, which will provide higher returns.
Mid-term options: One of my favourites is physical gold, silver and platinum. Why? Precious metals significantly outperform inflation, and they are 100% liquid. Long-term (past 25 years) gold has averaged about a 10% return and silver 9%. The last few years, the returns have been amazing, and this year is no exception. Gold will likely end the year with a 60+ % return, and silver over 80%. You read that right and imagine your savings growing rapidly. Will precious metals provide these amazing returns indefinitely? Of course not. However, we are still in a multi-year uptrend, and I encourage you to participate.
Second, you can consider high-quality alternative investments. Often, these investments are not liquid and must be held for 5 to 10 years.
Third, TFSAs are excellent vehicles for savings as there are no taxes on gains, and they are 100% liquid. There are a couple of important conditions you need to be aware of. One is not overfunding your TFSA account, and the second is adding funds back into your account after withdrawals. You may need to wait until January 1st of the new year if your account has reached the maximum allowed deposit. Also, you can choose between low, moderate, and high-risk investment options. You can even purchase physical gold and silver in a TFSA.
Long-Term Saving/Investing Options: The first that most Canadians think of is an RRSP or group pension/RRSP plan. If used properly, they can be a great way to supplement your later years. The key is to be very careful with your investment decisions over the journey. Unfortunately, I have met too many people who have lost 30 to 50% of their money in market crashes, and it can take 10 to 20 years to recover to their prior high. Investing is not a one-and-done event. No, you need to carefully monitor your investments and make strategic adjustments all along the journey. All asset classes function in cycles, and you need to be willing to change your asset allocations many times over your investment career. Business owners (incorporated) and professionals have superior long-term options with either IPP or PPPs. They can create their own pension with many benefits.
Key Point: I encourage you to maximize your TFSA contribution over RRSPs in most cases. Remember, RRSPs only defer tax, and if you build up a huge RRSP, you may end up with sizable tax consequences in your later years, especially if you do not strategize carefully.
I hope you found this helpful in considering some of your savings options and timeframes. I encourage you to start a savings plan or build a more resilient savings strategy. If you need guidance, please reach out to me.
I wish you and your family a wonderful Christmas and holiday season. If you are travelling abroad, make sure you have proper travel insurance. If you need comprehensive and affordable solutions, please call me. I will be off on a Christmas break from December 17th to January 6th, so if you need any insurance or investment help, please contact me before the 17th. Thank you
