Canadians & Saving: Do We Walk the Walk?
Has the global financial crisis led Canadians to feel more satisfied with what they have rather than constantly pining for more? The jury is out, but mixed signals seem to support a case for "do as I say, not as I do."
In February’s Harris/Decima poll conducted for Bank of Nova Scotia, less than one in five Canadians indicated they are spending less than they were in the preceding six months. Nearly 50 per cent reported that their habits remain unchanged, while the rest—amazingly—copped to spending more.
Yet in May, a Toronto-Dominion Bank analysis forecasted a so-called "shift to thrift." The research report predicted that Canadians will boost their personal savings rate up to 7 per cent over the next five years – more than twice the rate of the past five years. Pointing to the six-year high of 4.7 per cent reached at the end of 2008, the study cited forces such as ravaged stock markets, declining home values and rampant lay-offs as the catalysts for consumer belt-tightening.
Now that the psychological impact of wealth destruction has set in, you’re probably hearing a lot of anecdotal stories of penny-pinching. But judging by the raw numbers, we aren't seeing people reign in spending as much as suggested.
According to a study from the Certified General Accountants Association of Canada (CGA), Canadians are digging deeper into debt and turning to credit to fund day-to-day living expenses. This disturbing trend has pushed national household debt to $1.3 trillion, says the report. What’s more, over 20 per cent of Canadians who owe money said they could no longer handle their debt burden.
In reality, what this conflicting data really shows is how convincing people to save money is a complex issue shaped by a host of factors, including innate habits and mind-sets. Many Canadians simply don’t have the wherewithal to figure out how much they should be saving and the self-control required to put-off consumption now in favor of a more comfortable life down the road.
Fortunately, pioneering research into the study of behavioral economics is yielding some interesting results. For example, American scholars Richard Thaler of the University of Chicago and his colleague Shlomo Bernartzi of the Anderson School at UCLA advocate a new approach towards saving called "Save More Tomorrow." It channels human tendencies—such as procrastination and inertia—into a more productive use.
The idea behind the program is to get individuals to commit to siphoning a portion of future raises into increased retirement savings. The theory is that you won’t miss what you don’t already have. In each instance where the plan has been implemented, results have been overwhelmingly successful in boosting savings rates.
The challenge for those Canadians who truly are saving more is to try to replicate that success. First, choose a goal and set up a regular transfer using some kind of PAC or automatic payroll deduction. Then, consider what money-saving tips you’ll use to fund it. Otherwise, the money you’ve saved from making coffee at home instead of buying a latte will just get lost in the shuffle.
But to get the biggest bang for your buck, consider tackling larger expenses such as your mortgage. There are new and innovative offerings in the market that may generate substantial savings—found money that can be diverted towards some long-term financial goals. That’s really putting your money where your mouth is.