The most intense debate in personal finance is no longer whether it’s better to invest or pay down your mortgage.
Today’s guaranteed conversation starter is the question of whether you can find financial success by denying yourself small luxuries such as lattes or avocado toast and using the money instead to build wealth. Denial sells because it’s easy to understand and theoretically practical. If you put $20 a week into investments earning 5 per cent on average each year, you end up with close to $71,000 in 30 years.
An article I’m featuring in one of my Carrick on Money e-mail newsletters this week captures the down side of denial. For one thing, focusing on denial allows people who have money to dismiss those who don’t as simply lacking willpower. Denial also opens the door to discussions of needs versus wants, which appeals to our judgmental side.
Let me add one more criticism of denial – it doesn’t work as well as an alternative approach that lets you enjoy lattes and such with zero guilt.
All you have to do is set up an automatic savings/investing plan that kicks in every payday. This isn’t revolutionary stuff. It comes down to just paying yourself first, as recommended back in the inaugural edition of The Wealthy Barber back in 1989.
When you save automatically, you have the freedom to spend anything left over after covering your regular bills and expenses. Drink lattes. Eat avocado toast. Live it up, or dial it down. It’s your call because you’re covered on saving.
Let’s talk logistics. Your first step is to set a dollar amount of your paycheque to be directed into savings or investments. If you start young, say in your late 20s or early 30s, 10 per cent of your gross pay is good and 10 per cent of net pay is awesome. More will be needed if you start later in life, but don’t sweat the exact amount at first. Get automated, and then fine tune.
Next, pick a bank or investment company. If you have a timeline of 10 years or more, investing in a diversified portfolio makes sense. A quick, easy and cost-effective way to start investing immediately would be to set up an account with a robo-adviser.
For shorter periods, direct your money to an online bank offering top rates of 2 to 2.8 per cent. You’ll at least stay even with inflation at these rates.
Investment firms love pre-authorized contribution plans, so you shouldn’t have trouble setting up automated transfers each payday. They’ll likely just need the banking information contained in the coding found on a blank cheque (this information may also be available via your online banking website).
To transfer money into a high-rate savings account each payday, log into your account via phone, tablet or desktop computer and then go to the page for transferring funds. What you want to do is set up a recurring transfer from your chequing account to savings. If you get paid every second Friday, then arrange your transfers for those days.
Memo to online banks: Why aren’t you promoting the idea of automated savings to your clients with a super easy set-up page and cool graphics to help customers set goals and show them how their money is growing? The now-defunct Canada Savings Bond program used to own the franchise for promoting diligent saving and no one has stepped up as a replacement.
The household savings rate in Canada was 1.1 per cent during the first three months of the year, a sad number that tells us the denial strategy for promoting saving and investing hasn’t helped much. How could it? Our society revels in consumption and opting out requires discipline to manage your fear of missing out and the weird looks you’ll get from your friends.
To save, you have to force the issue with an automatic plan. Try setting one up and using it for a few months. If it works out, you owe yourself a latte.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, June 27, 2019