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Many Canadians struggle to strike a balance between the three major household financial pillars: debt reduction, investments, and saving for retirement. While a focus on debt repayment is hardly ground-breaking, Canada has become a special case in its prioritization of debt reduction over investing and saving. This is especially true when compared to our neighbours down south, where many Americans are currently saving to extreme levels with the personal savings rate rising above 8%.
The Globe & Mail recently reported that Canada’s national household savings rate, which is the percentage of disposable income remaining after expenses, is near its lowest point in six decades at just 1.7%. In fact, household savings fell from $3,500 in 2013 to $852 in 2018. Rather than saving, Canadians are focused more than ever on reducing their debt load, spending about 15% of their after-tax dollars on debt repayment.
One reason for this lack of saving is how readily available credit remains in today’s age, as many Canadians feel confident they can get a hold of funds in an emergency. Another factor is that Canada, as a whole, is ageing and people generally spend more than they save once their income drops in retirement. While this trend may be concerning, it’s not without precedent in Canada. Historically, Canadians tend to save when there is a downturn in the economy due to a lack of confidence. But it’s not just savings that are decreasing for the sake of debt repayment.
Investment rates also fell dramatically in 2019, specifically with RRSPs taking a big hit. One theory states that the combination of a stock market plunge last winter and climbing interest rates are responsible. As a result of these factors, Canadians made debt repayment a priority over their investment portfolios.
According to financial market analysis firm Strategic Insight Canada, the decline in investments was not the result of a worsening economy or fear of market volatility, but simply that people are using the funds they would otherwise invest in order to focus on debt repayment. They also added that this trend began in the latter half of 2018, and at this time interest rates were rising and new borrowing decreased dramatically.
Another cause worth considering is the fact that tighter lending rules, specifically on mortgages, mean that borrowers carrying new debt tend to be financially resilient, and this group is making a large contribution to this recent debt repayment trend. One more factor is the confidence that Canadians have in their personal financial position, as well as the economy as a whole. Compared to 2019, fewer Canadians are feeling optimistic about their financial future, with a 9 percent drop in confidence heading into 2020. This could mean that Canadians are focused on getting into the black to protect themselves against a dip in the nation’s economy, or even a full crash.
While paying down debt is a tangible, concrete way to take control of personal finances, the cash required might be put to better use in investments or savings and staying balanced between all three is what’s key.
While financial advisors may encourage the management of debt repayment, it shouldn’t necessarily come at the expense of savings. Any strong financial plan should account for debt management, long-term savings, and creating a balanced investment portfolio that can produce income regardless of how the market is performing.
Have your own thoughts when it comes to choosing between debt repayment, funding investments, or saving for retirement? Share them with us in the comments below!
