If you’re financially struggling to get ahead, here’s why.
Puny income growth is a fixture in the Canadian economy, new census data shows. Our economic reality is that prosperity comes not from a growing paycheque, but rather from the stuff you do with the pay you get. Three strategies to follow:
- Invest in your career
- Invest in your wealth
- Make one significant cut in your household spending
Census data shows that median total household income in Canada rose just 10.8 per cent cumulatively after inflation over the 10 years from 2005 to 2015, to $70,336 from $63,457. On an annualized basis, that’s just a bit more than 1 per cent a year.
As bad as these numbers are, they look comparatively strong on a longer-term basis. Incomes rose a total 9.2 per cent in the past decade and fell 1.8 per cent in the economically wretched decade before.
There are regional differences in the most recent numbers – high energy prices meant Western Canada carried the rest of the country. But winners and losers have traded places several times in the past few decades. The one constant is that the amount of income growth left over after covering the rising cost of living is minimal. The question economists keep asking about the recent economic upturn is why income growth isn’t stronger.
Investing in your career might be the best way to break the impasse of low income growth. What skills or knowledge would give you credentials to apply for a better-paying job? It’s smart personal finance to spend the money on programs that make you a more desirable employee in your field, even if you have to go into debt.
If you want to build wealth, regular investing in financial assets such as stocks and bonds is crucial in a world of weak income growth. A low-cost, diversified portfolio could conceivably produce average annual returns of 2 or 3 per cent after fees and inflation. Invested money grows like you wish your paycheque did.
Carve off a slice of every paycheque to go into a tax-free savings account or registered retirement savings plan. Any low-cost, well diversified investment will do. It’s far more important to establish the discipline of regular contributions than it is to pick the best possible investment. In investing, finding something that is simply good is good enough.
Cutting spending also has to be considered as a way of coping with weak income growth. Soaring household debt levels show we’re programmed to spend more, not less. But spending beyond our means is probably the most destructive form of financial behaviour today.
Find a significant regular expense and either eliminate it or trim it way back. A reduction in expenses is like a raise. The obvious choice for cutting expenses is debt. Not necessarily your mortgage, which is a basic expense and will be eliminated automatically as you follow your amortization schedule. Pay off your home equity line of credit and you eliminate the mandatory monthly interest payments. These payments have increased recently as a result of rising interest rates; expect more rate hikes in the year ahead.
Otherwise, try for one bold, difference-making cut in your spending. If you’re a two-car payment family, consider replacing one of the vehicles with a used car you can pay for in cash. Used cars are a bit overrated as an engine of frugality because of the potential for costly repair bills, but the average new car payment in Canada comes in at around $600 these days, according to the analysis firm J.D. Power. Even with a couple of sizable repair bills, you’ll still save a lot with a used car.
Lower your grocery costs by visiting multiple stores to buy as much as possible at sale prices. And, take a look at your telecom bill. Could you cut the cord entirely and go with online or over-the-air service for watching TV? Or, would a less grandiose package of channels suffice? Regardless, it’s well worth calling your provider(s) of cable TV, Internet and phone service, ask to speak to a relationship manager and see if there’s a discount available.
Cut your spending, invest in your career and build your investments. Thirty years of weak income growth data says these are the ways to build prosperity.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, September 13, 2017