A report from BMO (Bank of Montreal) revealed that around 30% of Canadians plan to lower spending in 2024 on the back of inflation, economic uncertainty, and a higher cost of living.
Due to the cost-of-living crisis, 42% of Canadians plan on changing their New Year’s resolutions, which include creating financial goals and a financial budget.
Several Canadians are struggling due to rising expenses in the last two years. In addition to oil prices and apartment rentals, households are also wrestling with outsized mortgage payments and inflated grocery bills.
Further, roughly 60% of Canadians have used credit cards to pay for holiday gifts. On average, it would take three months to pay back these bills accrued in the fourth quarter (Q4) of 2023. Additionally, 24% of Canadians don’t expect to pay off their post-holiday bills on time.
Canadians are financially anxious
The fear of rising and unknown expenses has led to financial anxiety among Canadians. Around 81% of Canadians are anxious about their overall financial condition, while 61% struggle to keep up with monthly bills.
The BMO survey suggests a majority of Canadians have set financial goals for themselves. For instance, 59% are planning for retirement, 46% are saving for vacation, and 39% are paying down debt.
Yes, most Canadians have financial goals, but 69% don’t have a financial plan, and 60% don’t have a household budget for the year.
The primary reason you work every day is to lead a comfortable life in retirement. So, it’s important to have a long-term financial plan, which will help you achieve financial freedom.
Canadians should realize that saving at least 10% of pre-tax income is crucial, especially if you are above the age of 30, to benefit from the power of compounding. Moreover, this savings rate should increase by 10% each year.
Basically you need to re-evaluate spending patterns and give a boost to your retirement fund in the process. Let’s see how.
How to build wealth over time
The average Canadian salary is just over $63,000, indicating a monthly payout of $5,250. So, you need to save at least $525 per month or $6,300 each year, given the 10% threshold. But where do you invest this money?
Once you have saved capital, it’s crucial to put it to use and derive inflation-beating returns over time. Canadians should aim to create a diversified investment portfolio that lowers overall risk.
A young individual can have a higher allocation towards equities, while those nearing retirement should have exposure to lower-risk instruments such as bonds.
The best way to gain exposure to the equity market is by investing in low-cost index funds that track the S&P 500 index. Here, you gain access to some of the largest companies globally, such as Microsoft, Apple, Nvidia, Meta, Alphabet, Amazon, and Tesla.
One such index fund is iShares Core S&P 500 Index ETF (TSX: XSP). With $9.2 billion in assets under management, the XSP ETF has an expense ratio of 0.09% and a management fee of 0.08%. Further, the fund is hedged to the Canadian dollar, shielding you from fluctuations in foreign exchange rates.
After adjusting for dividend reinvestment, the S&P 500 index has returned 10% annually in the last 30 years. A $525 investment each month would balloon to more than $400,000 at the end of 20 years.
