Archived newsletter – Canadians Saving 25% More

Canadians Saving 25% More

With the pandemic putting a damper on activities like dining out, attending concerts and vacationing abroad, Canadians are spending less and saving more. A lot more.

Statistics Canada, in a report issued on August 28, 2020, provided a detailed picture of the sharp shift in Canadian spending and savings habits.

From April to June, household spending in Canada crashed by 13.1%. Statistics Canada attributed the sharp drop to “substantial job losses, limited opportunities to spend because of closures of stores and restaurants and restrictions on travel and tourism.”

Household spending declines sharply

Some of the largest spending declines came in purchases of transportation services (-79.2%), food, beverage, and accommodation services (-45.6%), clothing materials (-38.3%) and new passenger cars (-37.8%).

During this same period, employees’ compensation declined by 8.9%. In ordinary circumstances, a drop of this magnitude would be expected to hurt household savings. However, due to government transfers to offset the economic impact of COVID-19, household disposable income rose by 10.8%.

This increase, coupled with a 13.7% decline in household spending (in nominal terms), pushed the household saving rate up to an astonishing 28.2%. That’s dramatically higher than the pre-pandemic savings rate in recent years of just 2% – 3% of disposable income.

According to Statistics Canada, “the increased household savings rate is aggregated across all income brackets,” though, in general, “savings rates are higher for higher income brackets.”

The Household Saving Rate in Canada increased dramatically to 28.20 percent in the second quarter of 2020.

Another perspective on this trend is offered in an August 2020 report by Investor Economics, which is part of ISS Market Intelligence.

Investor Economics estimates that Canadians added a stunning $127 billion to their savings and chequing accounts and term deposits in the first half of 2020. In comparison, the average amount of money flowing into savings, chequing and GIC accounts for the first half of 2017, 2018 and 2019 was $32 billion.

Without a doubt, Canadian savers are sitting on a pile of cash. The question now is, how will they put it to use?

Pay down debt or invest in retirement

As Investor Economics details, a significant portion of these savings is currently parked in deposit accounts. While deposit accounts are a safe place to keep your money, they pay only meager interest rates. After taxes and inflation, you may earn next to nothing, and you could wind up losing money if the cost of living increases.

One option for savers looking to put their funds to better use is to pay down debt. The less you owe, the better shape you’ll be in to get through a possible second wave of pandemic-induced economic slowdown.

Another option is to invest it. If you divert a portion of your savings into a mutual fund or another investment vehicle each month for the duration of the pandemic, you’ll add to your retirement nest egg and develop a healthy savings habit at the same time.