30% of Canadians Want to Reduce Spending: Here’s Where to Invest All Those Savings

Canadian investors should look to increase their savings rate each year and gain exposure to inflation-beating asset classes.

| More on:
Glass piggy bank

Image source: Getty Images

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool has a disclosure policy.

More on Investing

Volatile market, stock volatility
Investing

Growing Volatility: 3 Stable TSX Stocks to Buy Right Now

Given their solid underlying businesses and healthy growth prospects, these three stable TSX stocks could strengthen your portfolios.

Read more »

Construction work on a site
Dividend Stocks

2 Engineering & Construction Stocks You Can Buy and Hold for the Next Decade

Two prominent engineering and construction stocks are buying opportunities before the industry rebounds and grow in the next decade.

Read more »

Canadian Dollars
Dividend Stocks

For a Shot at $5,000 in Annual Passive Income, Buy 1,975 Shares of This TSX Stock

Are you looking to earn steady income? While there is no certainty in stocks, this stock can give you a…

Read more »

Target. Stand out from the crowd
Dividend Stocks

1 Magnificent Canadian Dividend Stock With 33% Upside to Buy and Hold Forever

Dividend stock Brookfield Business Partners LP (TSX:BBU.UN) is a powerhouse of growth, with even more to come in 2024.

Read more »

top TSX stocks to buy
Dividend Stocks

Passive Income: How Much to Invest to Get $6,000 Each Year

TSX energy stocks such as Enbridge can help you earn a passive stream of recurring income.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Investing

Where to Invest Your $7,000 TFSA Contribution

Unsure of what to do with a $7,000 TFSA contribution? Stick it in this ETF and chill.

Read more »

Value for money
Investing

3 Canadian Value Stocks to Buy Right Now

These three value stocks are excellent to buy in this volatile environment.

Read more »

protect, safe, trust
Dividend Stocks

Income Investors: 2 Safe Dividend Stocks to Own for Passive Income for Years

Long-term passive-income stocks should ideally offer enough dividend growth to counteract inflation while preserving or growing your capital.

Read more »