He’s 26 and, if typical of his generation, we’re all screwed.
His entire net worth ($23,000) is in a ‘Smart Saver’ high-interest account at BMO. So long as he keeps more than $5,000, he gets 1.1%. Below that a little less – zero%.
Do you understand the inflation rate is 1.4%, I asked? Yeah, he said. But it’s safe. And do you understand that the $253 of interest you earn in a year is taxed at 100%? Yeah, he said, but it’s safe. So you realize that by saving your money you’re losing money? Yeah, he said, but it’s guaranteed.
Do you know that if you put your money in preferred shares of BMO, you can earn 5.95%, instead of having the same bank pay you 1.1% on the identical money? And that instead of paying 100% tax, you’ll pay about 20%? No, he said. But I don’t care.
And I gave up.
As a survey showed one day this week, Canadians – heavy on debt and light on savings – are headed for golden years filled with Friskas and Pedigree. We owe (on average) $1.47 for every dollar we earn. Household consumption exceeds income. A third of us have no savings. Most of the other two-thirds don’t have enough. Personal loan and mortgage debt is at record levels. Wages are flatlined.
The average household investments total $130,000. Average household debt is $112,000. So, we have an average of $18,000 in liquid net worth, with most of the rest in our houses (average family net worth is $364K).
Does this look healthy to you? What might happen if the Canadian housing market followed the path of the American one, losing 20% of its value and trapping untold numbers of sellers in illiquid properties? Has the slide already started?
This week even CREA was chugging Pepto.
New numbers confirm what was forecast here some time ago – sales have crashed lower. In fact, fewer homes were sold last month in a stunning 70% of all Canadian markets, led by Toronto and Calgary. Average prices have also started their descent – down 1.2% from May, which happens to be an annualized plunge of more than 14%. Trust me, there’s more to come. I’ve a hard time understanding how this asset deflation will not last for a few years.
So, the assault on net worth has begun. Canadians’ fav investment (about 70% of us now own homes), and the Boomers’ ultimate folly, is under attack. And who can be surprised? After all, we binged on credit, created an unsustainable bubble and destroyed family balance sheets to get what we wanted, but often didn’t need. Now the reality of recession, debt, taxes and too few jobs hits.
The way out, of course, is clear. Sell real estate before it declines further. Downsize. Consolidate. Rent. Whatever. Trash debt. Drain off equity and invest in assets that pay you to own them. Escape housing’s inevitable decline and build up what everybody actually needs – liquid wealth.
Which brings me to the second problem. Whatever sucked the guts out of that 26-year-old is apparently contagious.
There is news that we’re opening new chequing and savings accounts at breakneck speed. The banks are pulling out all the stops to suck money into vehicles paying us peanuts, while Ally and the Dutch guy bloat with billions. The Boomers are leading the way, says one analyst, because they have “lost their mojo.” That’s not all.
Once again the herd is spinning, shifting, starting to stampede out of Mississauga and Kelowna, and headed for a cliff. Afraid of financial assets, now starting to doubt houses, they thunder towards the safety of cash, misunderstanding the greatest single risk possible is the one dead ahead – running out of money.
I may be boring, but I’ll be consistent. The only way to survive what’s coming is to reduce debt, and increase wealth. With our average liquid net worth, the last place to put money is a savings account or GIC paying you peanuts or fully exposed to tax. Don’t like risk? Buy a 4% bond in the bank, instead of a 1% bank account. Want less tax? Get some bank preferreds at 6%, not a bank GIC at 2%. Want to retire? Buy some stock in the bank, with money from your .25% bank chequing account. Confused? Get an advisor. And not at the damn bank.
And if you’re 26, grow a set. Will come in handy.
