Pitifully Low Savings Rates

I was reading an article the over the weekend. Seems a survey done by BMO found that 20% of respondents didn't save any money in 2014. Not a penny.

The article went on to say that the average savings rate in a Canadian household was a measly 3.6%.

Holy crow!

Only 3.6%!?

Before I transformed into the Loonie IT Guy last year, wifey and I were probably closer to a 15% savings rate. This is a substantially better rate than the 0% savings rate for 20% of Canadians. Although, a 0% savings rate is still better than a negative savings rate. That means you're taking on more debt or dipping into your savings each month.

So how can someone increase their household savings rate?

Well, as far as I know, there are two ways of doing this.

1. Increase your earnings.
2. Decrease your spending.

Increasing your earnings is the obvious choice. You'd either have to ask your boss for a raise or find a new job that pays more. However, once you do, this is where the problems start. First off, some people might want to celebrate a $5,000 a year raise or a new job that pays $10,000 more.

Well, I have a couple weeks off until my new job starts. Why don't we take the family for a vacation/trip?

When everything is said and done, after taxes are taken out, the net benefit of the raise or job change is nullified. Huh.

Even if the money isn't blown on a trip, it can be a combination of many things.

See a new dress that you want?

It's okay, I'm earning more money now.

The new Apple Watch is taking pre-orders now.

I don't really need this, but now I won't need to pull out my phone when I get a text message. This $400 is fine, because I'm making an extra $10,000 now.

Got home late because of TTC delays on the subway or accident on the highway and too tired to make dinner?

We'll just order in/eat out and spend upwards of $70 for dinner for 4, plus taxes and tips for food that is less nutritious, extra salty, and full of chemicals like MSG!

Yikes! The problem most people face, is that despite a raise, they will tend to spend up to or more than their income. Money in the bank is like a license to spend. Even if money isn't in the bank, people will still spend the money before they get it because in their minds, the $20 dress at H&M or $40 gold plated HDMI cable from Best Buy is much less than the $10,000 raise they received.

I have no problem if you just do this ONCE. You worked hard and deserved your raise. You should be allowed to reward yourself. Unfortunately, most people will justify one of these extra purchases and reward themselves DAILY!

So really, the first method of getting a raise won't help you with your savings rate.

This leads us to point number two... decreasing your spending.

Of the two options, this one is easiest. We increased our savings rate from 9.5% in 2013 to 30% in 2014! Granted, wifey did get a new job in November 2013 that came with a raise, but not enough that constitutes a 20.5% increase to our savings rate. But it's hard to get a substantial raise each year. For 2015, we're currently at a savings rate of 45%! I estimate we'll be around the 40% mark by the end of the year.

So how did we do this?

Well, obviously, aside from wifey getting a boost to income, we decreased our spending.

We cut our cable, switched from whole life to term insurance, picked up groceries by biking to the store, relied less on air conditioning, changed to a prepaid phone plan, and I even biked a few days to work.

While alone, each of these cost saving measures are minuscule in the grand scheme of things, put together, these savings turn into a huge ball of cash that just continues to grow. Once you start to spend less, it's easy to continue to spend less.

In total, I estimate through all our cost saving measures, we managed to save at least $470 a month (a very conservative amount given the cost of hydro in Ontario).

That's around $5,600 a year*. That's a little more than the yearly TFSA contribution room granted by the CRA**. 

So how does one calculate their savings rate?

That's easy. Just take any money that was earned or brought in (after taxes) subtract the money you spent and then divide that total by the money earned or brought in.

So how do we calculate the amount we earned? For some people, that's easy. Just add up the total of your pay cheques throughout the year.

For others, it can get complicated. Did you earn dividends? Add those up. Did you you sell stocks/ETFs and had a capital gain (or capital loss)? Add (or subtract) that to (from) your total. Does your company offer a group RRSP with company match? Include that as well. Tax refund? Sure, why not. Interest from the bank? Definitely.

Once you add up these income sources, that's the amount you brought in.

Now you need to figure out how much you spent. If you weren't keeping track of your expenses, this part is trickier. Unless you kept receipts, cash spending is lost. Just add cash withdrawals and assume you used up all that money. Go through your credit card statements and add those up. Go through your bank accounts and add up all automatic deductions such as mortgage and insurance payments. If you use your bank card to make purchases, add up all debit transactions.

Once this part is done, that's how much you spent for the year.

Now we use the formula to calculate your savings rate.

So if you brought in $100,000 and spent $95,000, your savings rate is 5% (100k-95k/100k).

If you brought in $100,000 (or whatever amount) spent all of it (like 20% of respondents in the BMO survey), your savings rate is 0% (100k-100k/100k).

Realistically, as long as your savings rate is not 0% or negative, you're in a better position than most people. However, if you're looking to retire early, it's best to maximize your savings rate as high as you can.

*The $5,600 a year in estimated savings does not equate to the 20.5% difference from 2013 to 2014. Aside from wifey's pay increase, we also moved out from high interest savings accounts to investing. Instead of earning a measly 1.8% interest on our savings, we're now earning more than that on dividends and distributions alone. If you count appreciation of stock prices, then we were probably closer to 6% last year after MERs. If we were invested for the whole year and not just from June, we'd likely have a higher rate of return. Finally, another part of the change was the fact that I started to spend much less than what my personal budget allowed.

**Unless the Government doubles the yearly contribution limit like how everyone expects them to do.