Don’t confuse saving with investing
, On Friday December 3, 2010, 11:54 am EST
Following on last week's discussion about things we should be doing at year-end, another key thing we need to keep in mind is how much we're going to spend this holiday season. I would hazard that the word "save" does not even enter into the vocabulary when the calendar counts down to Christmas; however, there is no reason to think any less about saving today than any other time of the year. The obvious reason is that failure to pay attention to how much we dole out on gifts and entertainment this month could put us in the more severe position of paying off debt come the New Year. But, aside from the difficulty Canadians have with saving in December, many still find it hard to differentiate saving from investing.The survey says…
In a recent Scotiabank survey (conducted by Harris/Decima), it was revealed that 46 per cent of Canadians find it easier to save, while only 11 per cent thought that investing was easier. Of those polled, 19 per cent said they found both easy, yet 24 per cent indicated they found both to be difficult. What is even more interesting is that of the nearly half that said saving was easier, 52 per cent said this was because they felt it required less time and effort, not to mention research, as well as 36 per cent who perceived saving to be safer than investing. That result is not altogether surprising considering what Canadians have been through in the past few years. Watching their portfolios shrink in 2008-09 and then whipsaw this past year, the belief is that investing = stocks = risk. The reality is that investing encompasses both fixed-income securities and equities, with the latter representing the greater degree of risk. This is the same as the misperception that RRSP investing means investing in the stock market, or that all mutual funds are somehow tied to the stock market.
Reading between the lines of the survey results, there is a suggestion that another reason people have a harder time getting their heads around investing is that it is associated with the long-term. This can mean a whole bunch of things to different people, from 10 years to 50 years; but either way it sometimes feels like the money is locked away for a long time, during which it is uncertain how it will grow and how certain its future will be. Saving, on the other hand, is generally viewed as putting cash in a bank account or money market fund, which we can draw from whenever we need to. I would argue that Canadians need to separate the two concepts.
What's the difference?
Saving is the act of taking a portion of the money we earn and placing it somewhere to sit in reserve, provide an income or grow. Investing is what we do with the savings. Putting $200 a month into my bank account is savings, but putting it into my RRSP in a balanced mutual fund is investing. The key thing is that I put that $200 somewhere other than into a shopkeeper's hands. The real issue, in my opinion, is that Canadians still need more help in getting the saving process down pat before talking about investing. The good news is that the survey found that 46 per cent of Canadians found that they were both savers and investors. Only 10 per cent saw themselves as investors, while 27 per cent said they were savers. A disappointing 17 per cent said they were neither. This is the segment of the population that needs to cross the savings hurdle first, and then figure out investing.
Out of sight is out of mind
For those having difficulty saving, it's either because there is no household budget in place, or one was made but not adhered to. Some recommend ditching the budget, but I believe you need to take the middle ground. First, have a look at how much is coming into the household from earnings. Next, get a ballpark number for what your non-discretionary spending needs are. These are things you need to pay for each month, like rent and food, but will also include other essentials like providing recreational activities for your kids or yourself (health is every bit as important as money). Now, look at your last three months of bank statements and see what the difference was between inflows and outflows. You might have to net out larger non-monthly items like property taxes and insurance. Most likely, there is going to be less left over than the difference between your income and necessary spending. You have just figured out how much you're spending on discretionary things. Take the average of the last three months and divide it by two and have this amount taken from your bank account. This has still left padding of 50 per cent of your non-essential spending and, over time you'll discover that what was left over was more than enough or not enough so that you can adjust.
To make it even easier, don't worry about where the extra savings is going right now, since there will probably be some anxiety over the smaller daily chequing account balances every time you go to the ATM. Once the anxiety, if any, has passed and you don't miss the spurious shopping on the debit card, take a look at what has accumulated. The next step is to think of your savings exercise as having two parts. First, it is building a rainy day reserve of cash in case of loss of income or sudden emergency. This should be around 2-3 months' worth of net (after tax) income. What's left over is what you're going to invest for whatever objectives you have (retirement, children's education, a new house, etc.).
Go and grow
That next step should feel clearer in that the savings has already happened. All you need to do now is figure out roughly what your objective is by sitting with an advisor, assessing how your investments need to be split between fixed income securities and equities and then having the monthly savings taken automatically out of the bank account to whatever investment account is going to - which would include your RRSP, TFSA or a non-registered account. For those starting off, it may not be feasible to buy individual securities like stocks, bonds and GICs, so keep it simple and begin with a solid quality balanced mutual fund that reflects the asset allocation you want. The advantage is that the investments will grow in line with your risk tolerance. Then just make sure to review the investments regularly (at least once a year) and make changes if necessary.
Soon you won't feel much different about spending less, but you'll see a cash reserve you never had and investments that are growing. Every five years, you can then re-assess your financial situation and objectives and adjust the rate at which you're saving. Hopefully, at some point, the vast majority of Canadians will answer 'yes' to both when asked if they find saving or investing easier.
About the survey
A total of 1,011 completed surveys were collected from a random sample of Harris/Decima panel members across Canada. The study was conducted from October 14th, 2010 to October 25th, 2010.
This was a standard panel survey among a random sample of Harris/Decima's Canadian panel members. In a fashion similar to a telephone study, email addresses from their panel were pulled at random, according to population and gender specifications, in order to make the study representative of the Canadian population by region and gender. When contacted to solicit participation, participants had no prior knowledge of the subject matter of the study. Harris/Decima controls access to the study through passwords to ensure that respondents can participate only once. Subsequent to completion of the study, the data was weighted by region, age, and gender.
Andrew Pyle (www.andrewpyle.com) is a licensed wealth adviser and associate portfolio manager with ScotiaMcLeod. A certified financial planner, Andrew has held several senior market positions in Canada's financial industry for over 20 years, providing economic and market strategy advice to individuals, corporations, central banks and major investment funds. He was previously chief Canadian economist with S&P/MMS International, chief strategist for dutch bank ABN AMRO, and vice-president and head of capital market research for Scotia Economics. Andrew writes regularly for Yahoo! Canada Finance.
No comments:
Post a Comment