2020 might just be one of the craziest years ever. With all the craziness that happened in the first 10 months, it is no surprise that the hysteria continued with the U.S. election. However, rather than focusing on the recent 2020 election, we wanted to focus on current Canadian Savings trends.

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Historical Savings

Many Canadians are terrible with money, living paycheque to paycheque. That is why there are services like payday loans, bankruptcy agencies, collection agencies, etc. Being bad with money can cause a lot of stress. It causes stress on the financial system, Canada Pension Plan, and Old Age Security. Furthermore, it causes stress on individuals as well. As they near retirement, they realize their savings shortfall and often have to adjust their standard of living quite substantially.

If we look at recent history, the last 25 years, the average savings rate in Canada has been abysmal. The rule of thumb has often been to save 10% of your gross income annually. Well for the last 25 years, the average rate has been around 4% according to tradingeconomics.com.

Let’s assume that someone was making $100,000 and saving 5% ($5,000) annually over a 40-year career. Those savings compounded at 6% annually through working and retirement. If this person wanted to maintain the same amount of income, $100,000 annually, their savings would be depleted in less than 11 years.

In the chart above, you probably noticed the nearly vertical line on the right hand side. Lets look at that in more detail.

Recent Canadian Savings Rate

If we look at the 5 years prior to 2020, we see that the average savings rate is roughly an abysmal 2.75%.

Assuming the average Canadian makes roughly $60,000, they have only been saving $1,650 annually. For many that will not be enough to support their lifestyle in retirement.

But like we saw above, 2020 has seen a marked increase in savings rate. In the first quarter of 2020 in doubled from the previous quarter. Increasing to 7.6% from 3.6% in Q4 of 2019. Than we saw an massive jump where the savings rate near quadrupled. It was reported at 28.2% in Q2 of 2020.

Why has the savings rate for Canadians increased so much?

Increased Canadian Savings

I guess there is somewhat of a silver lining to the effects of COVID. Without, we would not have seen savings increase. Due to COVID, restaurants, bars, retail stores, nail salons, barbershops, theaters, etc. have all been affected.

Because of those regulations, people have been forced to eat at home more, work from home, travel less, etc. This has forced discretionary spending to go way down. One of the few places where spending increased was in groceries.

Although this can be spun into somewhat of a positive because of the increased savings, what is the cost? Well, people are missing out on a lot of the social parts of life. I think many, if not all would sacrifice some savings to bring back some social events. However, that is not an option.

With the increase in savings, you would think most people would be in a better financial position. However, this is not necessarily the case.

Canadians Facing Financial Hardships

Those that are/were able to maintain an income during COVID are in a better financial position now than a year prior. However, these same people are also feeling more stressed about their finances. This is based on a survey from the Canadian Payroll Association.

According to the survey there are three groups that participants fall into; stressed, coping, and comfortable. In the previous 11 years (2009-2019), it was a pretty close to being an even split between the three. This year (2020), however, the stressed group accounted for 43% of respondents. Conversely, only 22% of respondents fell into the comfortable group.

Peter Tzanetakis, President of the Canadian Payroll Association said the following: “For over a decade, the financial wellness of working Canadians has been directly linked to core, stable, long-term factors. While the pandemic has forced many to refrain from spending beyond their means and saving more, it simultaneously created drastic uncertainty about how the economy will endure into the future.”

Due to the pandemic, even those that are ‘financial comfortable’, 62% are very concerned by the prospect of inflation. In addition, many more Canadians are worried about the prospect of retirement, and the potential for a recession.

Even though analysis and researchers were expecting the survey to produce more grim results than previous years, they were shocked as to the stark difference.

Effects of Financial Hardship

The effects of financial hardship can cut deep. Not only into personal and family life, but also into employment and businesses. According to the same survey, nearly 70% of respondents reported they spend work time thinking about personal financial matters.

Supposedly, that adds up to an estimated $20.3 billion in lost productivity. This lack of productivity can cause strain within the employment relationship. Furthermore, this is in addition to the strain it can cause in personal relationships and financial matters.

More than two years ago we wrote The Importance of Talking Money. In that piece, we talked about why talking about money is important. Did you know that money/finances are the second leading cause of divorce? Nearly 40% of all marriages in Canada already end in divorce. With increased financial stress for a lot of Canadians, it is quite possible we could see a lot more separations and divorces in the coming years.

Conclusion

In the end, it is great that Canadians have been saving more. However, it has come at a cost; more economic uncertainty, less social opportunities, and increased unemployment.

In an ideal world, as the economy stabilizes and things return to ‘normal’ Canadians would maintain their current savings rate. This would help them be prepared for future uncertainties, relieve strain on government benefits, and ensure more people could have a comfortable retirement. I guess we will have to wait to see if Canadians revert back to their meager 2.75% savings rate.

Sources:

https://tradingeconomics.com/canada/personal-savings

https://www.hcamag.com/ca/specialization/financial-wellness/canadians-are-saving-more-but-facing-greater-financial-stress/234284

https://www.cbc.ca/news/business/covid-19-spending-consumers-savings-1.5539911

https://www.creditkarma.ca/credit/i/canadians-saving-more-during-pandemic/

https://www150.statcan.gc.ca/n1/pub/11f0027m/11f0027m2014093-eng.htm

https://www.payroll.ca/PDF/News/2020/2020-NPW-Press-Release_EN.aspx

https://www.ctvnews.ca/business/survey-finds-working-canadians-are-better-off-financially-more-stressed-about-money-1.5114102