Top Ten Money Tips

Rob Carrick, the Globe’s personal finance columnist, recently posted an article on his top ten money tips. Interesting perspectives but I thought he missed a few important points.

Save More.

“You have to save more because fat investment returns won”™t be there.”

The personal savings rate for the third quarter of 2011 was 3.5 percent according to Statistics Canada. There seems to be a view that when you are scared, you save money and you spend less. Even with all of the scaremongering taking place in the world today, the consensus view is that Canadians may move the personal savings rate up to only about 6 percent by 2015.

What is missing from this tip is how much more Canadians should be saving. A 3 – 6 percent savings rate is simply too low even with “fat” investment returns. And there is a definite difference between saving and investing. You save for something, like a new car. You invest to grow wealth presumably for your retirement years. I assume Rob meant saving to invest. And if that is the case, a rate substantially above 3.5 percent is warranted.

Dividends Rule

“Quality dividend growth stocks rule.”

Unfortunately Rob does not highlight any quality dividend growth stocks. Perhaps he was hinting at Canadian bank stocks. That said, many Canadians have very little awareness of the stock market. They do not know how to invest on their own and they may not know how to start. Dividends may rule but a very important principle of managing money is do not place all of your eggs in one basket. Allocation and diversification are very important characteristics of a good investment plan. There is something to be said for holding bonds, real estate and cash in addition to dividend stocks.

Forget Early Retirement

“You likely can’t afford it, given our increasingly long lifespans and spotty commitment to saving. A recent Toronto-Dominion Bank poll showed the average age at which people hope to retire is 61. Talk about a rich fantasy life.”

Well, I guess our expectations are consistent with the Statistics Canada finding:

In 2000-2004, the median age at retirement was inversely proportional to educational attainment. The median age at retirement for those with a university degree was 59.8 years for men; 58.3 years for women.  The median retirement age for those with only elementary-level education was highest, with men retiring at 64.9  years, and women, at 64.6.

Most Canadians have retired in their early 60s. I’m not sure why he holds this one as a top ten money tip. For those wanting early retirement, they have likely planned for it over a long period of time and/or they have defined benefit pension plans that helped them to retire early. If they are not ready for early retirement, then the appropriate tip is to keep working and, more importantly, save for retirement.

Have An Emergency Stash

“Have a job-loss strategy in place: An emergency fund with three months living expenses is great, but even a fund that can carry the mortgage for a few payments is better than nothing. Keep your money in a high-rate savings account. Oh, and a line of credit can be helpful to bridge you over a period of money troubles.”

Yes. An emergency fund of about three months living expenses is a good idea regardless of a job-loss strategy. Unexpected expenses do happen. Using a line of credit as a bridge over a period of money troubles will likely just lead to more money troubles. That is not a great tip.

Don’t Count On Your House

“Housing wealth won”™t get you through: Counting on getting a big whack of money from the sale of your home to help pay for your retirement? Consider two things: There”™s more downside risk than upside potential for home prices in the near to medium term, and the price of buying a condo or bungalow is higher than you think.”

Industry Canada has a few things to say about housing assets.

The largest asset held by Canadians, on average, is their principal residence… Many consumers who do not own a home have very weak balance sheets… the ownership of a principal residence is strongly correlated with net wealth.

A better tip would be to clear off your mortgage as quickly as possible. Chances are that you will live in your house for a number of years and you will have equity with a house that you own free and clear even if a significant housing correction takes place.

Anticipate Another Dip

“An economic slowdown, if we get one, will be worse than the last time.”

Well, if we get one, it could be worse than the last time. Economic cycles are like that. Perhaps a better money tip would be to take advantage of the low interest rates to reduce debt quickly.

Watch Your Company Pension

“Keep an eye on your company pension plan.”

Given that less than 30 percent of all Canadian workers are covered by a defined-benefit pension plan, a better tip might be to keep an eye on your retirement savings including your company pension plan (if you are fortunate enough to have one).

Weigh Student Debt

“Taking on student debt has to pay off: To begin with, youth unemployment rates are about double the national rate. Next, add generational competition between 20-somethings trying to break into the work force and 60-somethings who want to continue working instead of retiring. It doesn”™t make sense to rack up giant debts on courses that won”™t give you an edge in this competitive work world.”

Not sure why this one would rank as a top ten money tip. But then again, I have been out of school for a long time now.

Have A Plan

“It”™s go-to time for financial planners: Planners, people have never needed your help more. Rampant debt, low levels of retirement saving, guesswork investing ”“ couldn”™t a comprehensive financial plan offer a big fix? Of course, you”™ll have to first sort out whether your business model is selling advice or selling investment products.”

Absolutely. A financial plan is a good thing to have. But do financial plans really change how people manage their money? Surveys consistently identify that the majority of Canadians do not have any financial plan. As a money tip I would add a key word: have an ACTION plan to improve your management of money. There are lots of resources on the web and in bookstores.

Keep An Eye On Fees

“The financial industry is hungry: What do banks, fund companies and investment firms do when profits are harder to come by? They get clients to pay higher fees and borrowing costs. Be vigilant about these extra costs. Complain to your firm or bank and then see whether you can get out of paying them because you”™re a great catch as a customer.”

Perhaps Rob meant to say: keep an eye on your spending. It is not just fees and the hungry financial industry. A better money tip is to track your spending and to identify areas to reduce your spending. Make your money go as far as it can.