The biggest mistake in personal finance is basing your plans for the future on what’s happening now.
Periods of stability and quiet do happen in finance, but not lately. We have seen some unusually fast-moving developments in the past 18 months and there’s no reason to expect things to lighten up as far as stocks, housing and inflation go. Here’s a test to see how well prepared you are for potential developments to come:
Billions of dollars have been left in savings accounts by people who cut spending during pandemic lockdowns. If inflation is at 3 per cent, as has been the case lately, what is your real rate of return on a savings account?
Several alternative banks are offering 1.25 per cent on savings these days, which means after-inflation returns of minus 1.75 per cent. We have not seen anything like this in recent years – the best savings rates in the market usually beat inflation.
What is the interest rate that big banks are paying on their savings accounts?
The regular rate, as opposed to temporary teaser rates, is typically 0.05 per cent. That’s a real rate of return of minus 2.95 per cent and annual interest of 50 cents per $1,000 saved.
What has inflation looked like on average over past years?
The average annual increase in the cost of living over the past 10 years was just 1.7 per cent, while the 20-year average is 1.8 per cent. If you’re a millennial or Gen Xer, you have never seen inflation as intense as it is now.
Stocks were up 29 per cent in the 12 months to July 31, as measured by the S&P/TSX Composite Index. What is the average annual 10-year return for the index?
The annualized return is 7.7 per cent, which is a total return based on both share price gains and dividends. A prepandemic view for the index: average annual total returns of 6.9 per cent for the 10 years to Dec. 31, 2019.
What is a reasonable long-term average annual estimate for stock and bond returns?
In the latest set of projection of returns for financial planners to use, the long-term average for Canadian stocks was pegged at 6.2 per cent, 6.6 per cent for developed markets outside Canada, 7.8 per cent for emerging market stocks and 2.7 per cent for bonds. These total return figures and those for other assets are reduced by 1.25 percentage points to cover fees.
The top-selling exchange-traded fund for the first half of the year tracked what asset?
Bitcoin. The 3iQ CoinShares Bitcoin ETF (BTCQ-T) was ranked first with inflows of $1.3-billion, while the Purpose Bitcoin ETF (BTCC-T) was fifth at $826-million. You’re speculating on a still evolving asset when you put money in bitcoin, not investing.
The interest rate on a rewards credit card is typically around 20 per cent – by comparison, what’s the rate at which you earn reward points?
Usually 1 per cent to 2 per cent, which means $1 to $2 per $100 spent on the card; some cards offer up to 5 per cent rewards in limited spending categories.
How many times has the national yearly average resale housing price fallen on a year-over-year basis since 1980?
Seven times, according to data from the Canadian Real Estate Association. Most recently in 2018, when the average price fell 3.9 per cent from the 2017 average to $490,931.
When the Toronto market crashed at the end of the 1980s, how many years did it take to surpass the 1989 price peak of $254,197?
Prices next exceeded that level in 2002, so 13 years. Prices now are close to four times higher than they were back then.
Discounted five-year fixed rate mortgages can be had for 2 per cent or even a bit less these days; when was the last time rates were above the 3 per cent mark?
You only have to go back to winter 2019. Discounted five-year rates back then were in the area of 3.24 per cent.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, August 17, 2021