Lots of attention has been paid to the financial risk-takers in the pandemic – the people bidding to buy houses, buying expensive stocks and dipping into speculative things like gold and bitcoin.
But the ones who may end up doing the most good for our economy are the people who added a stunning $127-billion to savings and chequing accounts and term deposits in the first half of the year.
“The amount of liquidity building up in the system is unreal,” said Carlos Cardone, senior managing director at Investor Economics, which is part of ISS Market Intelligence. “If redeployed into investments or expenditures, this might well be the engine for the recovery of a good part of the economy.”
Investor Economics, which provided the $127-billion figure, says the average amount of money flowing into savings, chequing and GIC accounts averaged $32-billion for the first half of 2017, 2018 and 2019. Those flows were considered to be fairly high until the pandemic scared people into maximizing their savings. “This year’s number is beyond anything we have seen,” Mr. Cardone said.
Another take on this trend comes from Statistics Canada, which tracks our national savings rate and has its eye on the pile of cash accumulated this year. The percentage of after-tax income going into savings has jumped from just 2 per cent to 3 per cent prepandemic to 28.2 per cent from April through June.
Money held in deposits of any sort today is painfully unproductive, especially in comparison with stocks in recent months. Interest rates fell like a rock when the pandemic began and banks, trust companies and credit unions have continually been cranking interest rates on savings lower.
Big banks are pretty much out of the business of paying interest on deposits now. One bank’s online savings account offered 0.05 per cent early this week, while another bank paid zero on balances under $10,000 and 0.1 per cent on higher amounts. Meantime, high rate savings accounts at alternative banks and credit unions paid no more than 1.5 to 1.8 per cent. Get those rates while you can.
Mr. Cardone noted that a significant amount of the money that was parked safely in 2020 sits in chequing accounts, where interest is either paid in trace amounts or not at all.
After taxes and inflation, safely parked money may earn you next to nothing. You could even end up losing money if the cost of living increases. On that basis, it’s tempting to laugh at anyone keeping money safe while so much money has been made in stocks, in gold, in housing, in bitcoin, and more.
But there’s potential for a lot of good to come out of that safely parked money if it’s used smartly and not left to sit for years. It’s much harder to reach your financial goals if you simply accumulate money in savings, earning nearly no interest.
Debt reduction is an excellent use of money parked in a savings account. Interest rates on debt right now are very low, whereas rates of return from stocks and bonds have been strong in recent months. But you’re guaranteed a benefit when you pay down debt, while financial markets are unpredictable. The less debt you carry, the better you’ll be able to weather a second wave of the pandemic that causes a loss of jobs or income.
For the good of the economy, some of that $127-billion should be spent as well. The latest numbers on retail sales suggest we’re buying more stuff than we were before the pandemic, but spending on services remains weak. The economy could definitely use more help from consumers.
Of course, some of the $127-billion should be invested. Forget about whether the stock market is too hot, too cold or just right. Start shovelling money into a diversified portfolio in regular increments – every payday or every month – and stick with that schedule until, say, retirement.
We all benefit if that $127-billion blob of savings is spent wisely. The economy would grow and gain strength from lower household debt levels. Jobs and wages would stabilize and the stock market might find a second leg of growth.
Thank a saver today. They’re doing heroic work that could be vital in the months ahead.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, September 8, 2020