Maclean’s magazine has an interesting article regarding the plight of “savers” in Canada after years of ultra-low interest rates. In their efforts to stimulate the economy through spending, the Bank of Canada has created an environment where it pays to spend but costs to save. For example, due to the low-interest rates, $10,000 in a five-year GIC, assuming inflation rates hold steady, will shrink to $9,670 in 2016. You had $10,000 and have LOST $330. Alternately, I predict that that same $10,000 invested in Real Estate, could lead to a yield of approximately $40,000.
On the other hand, this environment has encouraged Canadians to live well outside their means. Canadian’s now have so much debt that an increase in rates would cause a second national financial crisis.
Although the article highlights the paradox now faced by Canadians, go into debt or lose your money, the author neglects to mention a solution. An examination of the market suggests that the wisest thing to do is to spend in some areas and save in others. Use any extra money that would have otherwise been used for savings and invest it, in Real Estate for example, but forgo extravagant spending on non-essential items that don’t yield any investment gains. In other words, rather than buying a sports car that will lose its value immediately after purchase, use the money to purchase a rental home that will generate added income and reduce the debt load.
An interesting thing to consider is that when you save money in a bank account, what you are actually doing is giving the bank money with which to invest. The bank takes that $100,000 in your savings account and loans it to someone buying a house. You receive an extra $10 monthly to compensate for the risk, while the bank makes back over $1000 monthly on that same investment. Smart investing in this market means doing exactly what the bank is doing, but making sure that your pockets sees the high returns rather than the Bank President’s.
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