How are your pandemic savings doing?

Apparently, the pandemic has resulted in incredible savings for Canadian households. According to Statistics Canadathe savings rate is said to have jumped momentarily to over 25% in 2020, before falling back to around 10% in 2021 - rates not seen in ages.

Judging from these statistics, good saving habits are making a big comeback, thanks to or despite the pandemic.  

 Statistics Canadaalso reports that during this period, Canadian banks accumulated record deposit balances. Indeed, more than $200 billion is currently sitting in banks. Is your travel fund lying dormant in a savings account while you wait for your next opportunity to head South? Are you holding on to cash that you would normally spend on cultural, restaurant and other struggling industries? Or are you thinking about using these savings to get out of debt or to stop being so dependent on your biweekly paycheque?

Have your money habits changed that much?

Saving is hard, and working from the comfort of your home doesn’t make it much simpler.

When we take a closer look at the relatively widespread belief that everyone and their mother saved money during the pandemic, it doesn’t quite hold up—or at least, not everyone has benefitted equally.  

Some didn’t have the option of teleworking and reducing their travel costs, while others lost their jobs altogether. Despite the government support measures for individuals and businesses, job losses—and the resulting career changes—had a significant financial impact on many households.  

Furthermore, a stunning combination of economic phenomena has made matters worse:

  • Inflationwhich has reached heights that an entire generation of workers has never experienced, by definition has a negative impact on the value of savings.
  • Record real estate pricesare making home ownership much more difficult, especially for young people. Paradoxically, existing owners feel like they’re getting richer. However, unless you own several properties, an increase in the value of your home will be matched by the price of buying another if you wish to move. So, are owners really becoming wealthier?
  • Labour shortages and the scarcity of qualified workersare exacerbated by the disconnect between labour market needs and the skills of employees from sectors that are slow to recover. A waiter can’t just turn around and become a robotics technician. The training needed to make such a career change is expensive and takes time, and certainly doesn’t boost savings.
  • Supply chain disruptionsare resulting in product shortages and, by extension, higher prices. Even so, this hasn’t curbed families’ appetite for consumption. Some have spent colossal amounts on renovation and landscaping, for example, using home equity lines of credit grossly inflated by increased property values, or savings for trips they were unable to take. In any case, these strategies have in no way contributed to households’ savings.

Don’t beat yourself up; statistical averages are not representative of the middle class.

Do you feel like the headlines trumpeting the latest economic trends don’t apply to you or fit your situation? You’re right. Statistics don’t always paint the most accurate picture either. After all, the average savings rate is just that—an average.  

You don’t need to be a genius to understand that it’s easier for a household to save when its income exceeds a certain spending threshold and allows for a “comfortable” lifestyle—say $75,000 a year. Even if they spend more, families with higher incomes can meet their basic needs more quickly, so their capacity for saving grows very quickly and pushes up the average.

It may therefore be more appropriate to compare yourself with the median, or to look at savings in relation to income levels.

According to Bank of Canada calculationsCanadians accumulated, on average, $5,800 in extra savings in 2020. However, 37.2% of these exceptional “COVID” savings was concentrated among the 20% of the highest earners, while less than 10% was saved by the 20% of the population with the lowest income.

More importantly, the same Bank of Canada report reveals that of the $5,800 in savings for 2020, approximately $4,000 is due to spending shortfalls, and the rest, to disposable-income gains.  

Is it realistic to believe that a temporary reduction in spending and the sudden increase in disposable income will translate into new savings habits? The markets don’t seem to think so. The rising stock market suggests that investors expect the money currently waiting on the sidelines to make its way back to businesses thanks to avid consumers who are more than willing to spend it. And that’s how the so-called COVID savings will disappear!  

Magic isn’t a strategy.  

What’s the purpose of this lengthy explanation? Well, savings need three things to grow: time, sound financial habits and common sense.

When it comes to increasing your savings, rates don’t matter as much as time. The longer you let your savings work, the more they’ll grow. That’s the power of compound returns.  

If you want to optimize the strategy, you need to be a consistent saver. Over the course of your lifetime, save some money, even a little, before incurring any expenses. Always contribute to your savings first.

You’d like to save more? Don’t count on a forced “lifestyle change” to miraculously generate savings, like a pandemic.  

Stick to your goals, and above all, let time do its work. Savings that stay invested for a long time end up growing on their own and even producing more income than the saver’s salary.  

Isn’t that a goal and a strategy in itself? The freedom of not needing a job, because your savings have been consistently at work for a long time. No magic there.  

The desire to save starts with the goal of giving yourself the means to achieve a certain degree of freedom. Taking care of your finances is a way to take care of yourself and your family. It’s just common sense.