Save to invest

A popular exercise at this time of year is the infamous New Year Resolution. What will be yours? We’ve heard it from dozens of pundits. Financial gurus constantly preach to us on its merits. Even our parents lectured us on it. We’ve all heard it before, but how many of us actually do it?

Saving 10% or 15% of your gross annual income is called “paying yourself first.” A part of all that you earn is yours to keep. As such, cut a cheque for yourself at a minimum of 10% from each pay cheque that you earn before doing anything else with it. If you wait until all of your other expenses are paid (eg. groceries, entertainment, travel, etc.) the likelihood of having anything left to save at the end of the month is slim to none at all.

I recall reading an article in the Financial Post in early 2010 titled “How to profit from China’s transition.” It had struck a cord with me when I read a sentence in the article as follow “… the Chinese tend to save much more of their income than people in Western countries, because they have less of a social safety net.” Given how little we save in Canada, an industrial nation with a highly developed science and technology sector, even in light of the credit crisis lesson of 2008, there is perhaps some truth to that statement.

Personal savings rates did rise sharply in 2009, especially in the U.S. and U.K. The fear was heightened with the real estate correction in combination with the fall in the equity market. Everyone feared that more losses were to come and thus tightened their spending. This resulted in increased savings to 4.8% in 2009 versus an average rate of 3.7% in 2008. (BMO Capital Markets Economics).

According to Statistics Canada’s reported 2013 third quarter report, our household savings rate is close to a 16 year high at 5.4%. Though less than ideal, it is a positive trend in the right direction as shown here:

2005 Q1                     0.9 %
2008 average            3.7 %
2009 average            4.8 %
2013 Q3                      5.4 %

China’s savings rate in 2006 was 50%, and was anticipated to be a bit less today as people are getting accustomed to a higher standard of living. However, according to a recent study done by the People’s Bank of China, household savings rate in China continues to stand at 50% versus the global average of 20%. Why is there such a spread between Canada’s 5.4% versus China’s 50% savings rate? Could the reason really be due to the fact of an under-developed social security system in China? Therefore, these folks must save for retirement, healthcare and education.

In Canada, however, could it be our belief that our social network, which includes our Old Age Security (OAS) and associated benefits (Guaranteed Income Supplement and Allowance) will take care of our retirement needs if we fail to do so ourselves? At age 65 and/or age 67 given the recent changes to the OAS qualification, assuming residency requirements are satisfied in Canada, we will qualify for $551.54 full OAS each month indexed quarterly starting January 2014. The GIS cheque offers $495.89 per month (assuming a married couple both receiving full OAS). And if eligible, an Allowance cheque for $1,047.43 per month is also available to those between ages 60-65.

Aside from the government transfers, there are a number of other publicly funded services and social programs that benefit those with low-incomes like Medicare, public education for grade school; subsidized post-secondary education, and subsidized housing.

Do Canadians need to save 50%? No, this is not necessarily good for the overall economy. It is important to spend in order to spur growth in one’s economy. Let’s just use the international savings rate of 20% — this still is nearly four times higher than Canada’s 5.4%. This is an indicator that we simply enjoy spending money rather than saving money.

Let’s make one of our 2014 new year resolution to increase our savings by just 5%. Once you make a commitment to take this important step, you can then move on to the next step of investing. Yes, there is a difference — saving is concentrating on the amount saved and investing is maximizing the rate of return. The two are not mutually exclusive. Financial security is achieved by optimizing both.