Money Like You Mean It

Personal Finance Tactics for the Real World

Erica Alini

• Publisher: Dundurn Press
• Year: 2021
• ISBN:
  9781459748699
• Topic: Personal Development
• Subtopic: Personal Finance

"The first personal finance book for the 2020s: expensive housing, BNPL, side hustles, negotiating a raise, and much more. Erica Alini is one of Canada's top personal finance pros, and this book shows it." —ROB CARRICK Wrestle debt to the ground. Figure out whether you should rent or buy. And determine if a side hustle is really worth the hassle. Get a job, buy a house, spend less than you make, and retire at sixty-five. That's advice for a world that has largely disappeared. Even good jobs today often have no guarantee of stability. Home prices have reached the stratosphere. Meanwhile, student debt drags you down just as you're trying to take off in life. To survive and thrive in today's reality, you need a whole new personal finance tool kit. Personal finance reporter Erica Alini blends the big picture with practical advice to give you a deeper understanding of the economic forces that are shaping your financial struggles and how to overcome them. Packed with concrete tips, Money Like You Mean It covers all the bases: from debt to investing and retirement, plus renting versus buying, and even how to tell whether a side gig is really worth the effort. It's the essential road map you need to make it in the current economy.

CHAPTER 1

MIND OVER MONEY

WHY DO YOU HAVE DEBT?

Don’t worry, I’m not looking for a confession. This isn’t about making you feel like a weakling because you drank the proverbial $5 latte this morning instead of a homemade cup of joe. Nor am I under the illusion that sticking religiously to your French press and forsaking takeout guarantees you’ll be able to pay off your credit card balance at the end of the month. I know this from experience. When it comes to food and drink, I have things down to a science. I buy my favourite brew in bulk on Amazon and plan meals a week at a time. And sure, this saves me money. But if the transmission of my 10-year-old car suddenly gave out tomorrow, I’d have to make some tough financial choices (and let’s hope I didn’t just jinx myself with that).

What I’m asking here is this: Do you know why you and I and most other people have so much debt?

It’s not just because of the choices we’ve made or because of our individual circumstances. We live in a world that makes it extremely easy to borrow. I know you didn’t crack open this book for a history lesson, but stick with me for a minute while we speed through the decades — understanding how we got here will help you put your own debt struggles in context. Once we’ve had a close look at the larger forces that shape why and how we borrow, I’ll talk about some simple strategies you can use to fight back, kick your debt, and turbocharge your savings.

Canadians owe more than $2 trillion in household debt. That’s roughly equal to the size of our entire economy. It means that the value of all the mortgages, credit card debt, and other loans we collectively carry is roughly the same as the value of all the goods and services we produce as a country. Measured as a percentage of gross domestic product (GDP), our pile of household debt is one of the biggest in the world. We have the dubious honour of being ahead of both the United States and the United Kingdom.

But living in the red is hardly a uniquely Canadian thing. When you look at how much debt Canadians carry compared to their after-tax income, we don’t come close to leading the pack. The Swiss, Norwegians, and Australians — to name just three — have higher household debt levels.

People didn’t always have this much debt. At the start of 1990, Canadians’ debt was 87 percent of their collective after-tax income. By the end of 2019, it had skyrocketed to 181 percent. Another way to think about that: for every dollar of income we bring home on average, we owe $1.81. And while the relative size of our debt load shrunk immediately after the start of the pandemic, because many of us rushed to save up, it soon started climbing again.

So why did we start racking up so much debt? Did someone put something in the water? Did we develop a gene mutation that turned most of us into spend-more-than-you-make zombies?

I won’t pretend to have the full answer. Heck, economists don’t have all the answers, either. But it’s pretty clear that how we got here has a lot to do with low interest rates, high prices, and easy access to credit.

• • •

Low Interest Rates

Interest rates were once much, much higher than they are now. Chances are, if you were born in the 1980s or 1990s, the idea of your parents borrowing money at a rate of 18 or 19 percent interest leaves you gobsmacked. I’m an older millennial — I have a husband, a kid, a house, and the aforementioned aging car — and mortgage rates have been in the low single digits for as long as I’ve been aware of what a mortgage is.

Why are rates so low now?

Interest rates started to decline in the 1990s — not just mortgage rates and not just in Canada. It had a lot to do with a number of countries figuring out a new and better way to keep inflation in check.

But let’s rewind the clock a little further. By the late 1970s, high and unpredictable inflation had become a major pain in the neck for everyone. Constantly rising prices forced consumers and companies to waste a lot of time worrying about what they’d be able to afford in the future. Workers demanded higher wages to keep up with the cost of living, and businesses, in turn, had to raise prices so they could pay those higher wages. It wasn’t pretty.

By 1981 Canada’s annual rate of inflation was a mind-boggling 12 percent, and things weren’t much better in many other rich countries. That’s why central banks spent much of that decade cranking up interest rates to wrestle inflation back under control. When interest rates go up, it costs more to borrow and pays more to save. This creates an incentive for both people and businesses to squirrel away more of their money. Overall, everyone tends to spend less, which prompts companies to increase their prices more slowly, or even to lower them, bringing down the inflation rate.

But, in Canada at least, beating down inflation by jacking up interest rates turned out to be like a game of whack-a-mole. As soon as the Bank of Canada eased off interest rates, prices would spike again, and the cycle would repeat.

No one was enjoying that constant hammering, so in the early 1990s the Bank of Canada, along with central banks of other countries, came up with a better system. They started to actively aim for a desirable low level of inflation. In 1991 Canada declared it would start targeting inflation of 2 percent per year. This helped everyone know what to expect in terms of future inflation, and a few years later the bank finally reached its target. Canada’s annual rate of inflation hasn’t strayed too far from 2 percent ever since.

That has gone a long way toward solving the problem of high and volatile inflation, but it also helped create a new problem: persistently lower interest rates made it cheap to borrow money.

The financial crisis of 2007–2008 didn’t help. Even though a lot of the crisis had to do with reckless lending and borrowing, interest rates dropped even lower as central banks scrambled to soften the impacts of the recession in various ways. When interest rates are low, people and companies save less and spend and borrow more, creating economic activity. The economy took a really long time to re-emerge from that swamp — I can attest to this firsthand, as a proud graduate of the class of 2008 — and interest rates got stuck in ultra-low gear.

More than a decade after that crisis, interest rates in Canada, the U.S., and other countries had just started to come up a bit when along came the Covid-19 pandemic. The global economy went into another funk, and down went interest rates again.

Central banks, to their credit, are well aware that low interest rates have made it easier for people to borrow too much. They’re worried about it. The Bank of Canada has called our massive household debt one of the key vulnerabilities of the Canadian economy. But there isn’t much central banks can do about it, says Christopher Ragan, a professor at McGill University and one of Canada’s best-known monetary policy experts. Central banks “have dedicated their one policy instrument to their primary thing, which is keeping inflation low and stable,” he says.

There is no magic wand the central banks can wave to keep inflation at the target while also making borrowing a little costlier for people — nor do they have a mandate to rein in household debt. The Bank of Canada has one job when it comes to monetary policy, and that is to manage inflation, which has proven tricky enough.

Central banks aren’t the only force keeping interest rates low. Many economists think another reason borrowing is cheap is because right now the world’s savers outweigh its borrowers. You may be wondering what the heck they’re talking about, since so many people have a lot of debt and little savings. But population aging, for example, means that there are scores of people who’ve been saving up for retirement. Also, some rich countries like China and oil exporters in the Persian Gulf have been building giant reserves of savings. At the same time, technological change means that many companies can make oodles of money by selling things like digital advertising. They don’t need to borrow to build factories and invest in heavy machinery like the industrial giants of yore. All in all, the result is too little demand to borrow money, which keeps interest rates low.

We’ve definitely seen a bit of inflation recently, starting about a year after the onset of the pandemic. A sustained and significant increase in consumer prices would send interest rates up and make it costlier to borrow. But as I write, economists and investors are divided as to how concerned we should be about those slightly higher inflation rates.

• • •

High Prices

Achieving low and stable inflation was central bankers’ big feat of the past 25 years or so. The prices of most things have been rising gradually, which is a very good thing for companies and for consumers like you and me.

But the prices of some things have been growing much faster than both inflation and salaries. Take tuition, for example. In a 2018 report for RBC, economist Gerard Walsh figured that back in 1990, a student would have to work around 290 hours at a minimum-wage job to make enough money to pay for one year of tuition.¹ Today, you’re looking at more than 500 hours — and that wouldn’t even cover the cost of books or those pesky mandatory student fees.

But tuition costs are a sideshow compared to what happened in the housing market. From 2007 to 2017, the prices of single-family homes in Canada’s cities grew 2.5 times faster than Canadians’ incomes — and that was before the pandemic housing boom. In February 2021, a report by the National Bank of Canada noted that for a median-earning household squirrelling away 10 percent of their pre-tax income, it would take 60 months — five years — to save up for the minimum down payment on a house in a major urban centre.² “At a national level, there has never been a worse time to accumulate the minimum down payment,” economists Kyle Dahms and Camille Baillargeon, the report authors, noted. And that includes the previous peak linked to the housing bubble of the late 1980s.

For a time this was a problem primarily for those living in or around Toronto and Vancouver. The situation there has long been completely ridiculous. In Vancouver, it takes a household with a median income an unfathomable 32 years to save up for a down payment on a house. To look at housing affordability a different way, that same household would have to spend around 78 percent of their income every month on mortgage payments for the average non-condo home. In Toronto, you’re looking at more than 24 years to save for a down payment on a house, with mortgage payments taking up 60 percent of median incomes. To put that in perspective, the general rule of thumb is that people should spend no more than 30 percent of their pre-tax income on housing.

But buying an average house with an average family income is also getting tougher in Montreal and Ottawa, not to mention smaller cities like Hamilton, Ontario. The pandemic prompted scores of millennials to pull the trigger on purchasing their first home. And buyers of all ages ditched their urban digs in favour of bigger properties and backyards. This helped fuel a housing craze that swept across Canada, with some of the steepest price increases in smaller communities.

I’ll have much more to say about housing — including for renters — in chapter 3, but here, let me highlight this: even in cities where homes remain relatively affordable, property values are significantly higher compared to incomes than they once were. What that means is, as borrowing costs shrank, our mortgages became that much bigger. Today, Canadians are carrying $1.7 trillion of mortgage debt, up 70 percent from just a decade ago.

• • •

Easy Access to Credit

Borrowing didn’t just get cheaper — it also became easier. Since 1985, Canada’s adult population has grown from 19 to 31 million people. The number of credit cards in circulation, meanwhile, has ballooned from 14 million to 76 million, and that’s only counting Visa and Mastercard. And fully 30 percent of us are in the habit of having a carry-over balance.

Are we piling on credit card debt because it’s cheap? No, we do it because it’s easy. But let’s be clear: this isn’t just about swiping your card for a Carrie Bradshaw–style shoe-shopping spree. Or because you need alloy rims on your truck. I’m also talking about when your dog needs shots and now you’re $150 short at the end of the month. Are you going to take out a loan? Borrow from your parents? Probably not. You quietly put that bill on your credit card, and just hope you’ll be able to pay it off soon.

Credit cards are tricky because, with a typical annual interest rate of 20 percent, they can sink you into debt really quickly. But, for Canadians collectively, that’s not where most of our liabilities come from. Credit cards account for just 5 percent of this country’s pile of household debt. Mortgages, unsurprisingly, make up the lion’s share, about 70 percent. But another big slice, almost 20 percent, comes from lines of credit.

With lines of credit, borrowing is both cheap and easy. The interest rate is generally higher than that for mortgages but much lower than that for credit cards. But, as with credit cards, you can get away with making just minimum payments every month. Lenders bill this as “flexibility,” and it is a feature that can come in very handy in some cases. But it also enables you to keep taking on debt for a very long time.

Then there are auto loans. Another thing that makes borrowing easier is stretching out the time frame for repaying your loan. If you’re allowed to take longer to extinguish your debt, you can make smaller payments. That’s exactly what lenders did with auto loans. Canadians used to have up to five years to pay off their cars. Today, it’s common to take eight years.

So here we are now. We have collectively gotten to the point where, today, we owe something like $1.75 to $1.80 for every dollar of after-tax income on average — many of us have way more debt than that. (And the average figure may have gone up since this book went to press.)

Of course, none of this means that racking up a ton of debt is inevitable. But I would argue that falling into a debt trap these days is a lot easier than it used to be. And whether you’re trying to avoid ge...

Table of contents

• Cover
• Title Page
• Copyright
• Contents
• Introduction: How to Money Like You Mean It
• 1. Mind over Money
• 2. Know Your Enemy: Debt Is Not Created Equal
• 3. Everything Starts with Housing
• 4. Making Money Like You Mean It
• 5. The Big Fat Retirement Myth
• 6. Learning about Investing: Not Optional
• 7. Prepping for Life’s Curveballs
• 8. Sharing Money and Paying for Babies
• 9. All in the Family
• Conclusion. Go Get Your Acorns
• Acknowledgements
• Notes
• About the Author
• Back Cover