The Decibel - Your personal finance questions answered, with Rob Carrick

Episode Date: December 6, 2023

Managing personal finances while navigating 2023′s economic landscape is stressful, especially for young people. Is now the time for a down payment for a home? How do you even begin saving with sky-high rents? Where is the safest place to begin investing?Listeners asked these questions (and more) to The Globe’s personal finance columnist Rob Carrick, who spoke to Decibel host Menaka Raman-Wilms in a Globe Campus virtual event. We answer the most pressing queries to help you get a better handle on your money.Questions? Comments? Ideas? Email us at [e-mail]

These days, you might be looking at your bank account with a bit of anxiety. The cost of living crisis isn't letting up. Housing and rent are at all-time highs, and the holidays are around the corner, when everyone's spending more than usual. It can be especially stressful for young people just beginning to manage their finances. So along with Globe Campus, we ran a special virtual event for students, a Q&A with the Globe's personal finance columnist, Rob Carrick. I spoke to Rob last month, and we took questions directly from students on how to get a better handle on money.

Today, we're bringing you part of that conversation. I'm Meenaka Raman-Wilms, and this is The Decibel from The Globe and Mail. Rob, thank you so much for being here. Glad to do it. Today's financial world can feel kind of overwhelming at times, frankly, right? We hear about high inflation, there's high interest rates, the cost of living is high, the risk of recession is kind of always looming right now. I guess, what would you say to someone in their early 20s who's maybe worried about how they'll navigate it all? What should they be focused on? Well, one thing I'd like to point out is that everything that we're seeing

now has been seen before, and Canadians and people around the world have made it through the other side. These are all natural cycles in the economy. We haven't seen inflation in a long time, but here it is. High interest rates, we've had them before and you will get through this and it will be okay. I think what you'll want to focus on is what's important to you, what your goals are and how you will accomplish those. Don't worry so much about what the economists are telling you and what the forecasts are saying, because you can really get off your game by reacting to everything that's happening in the day-to-day economic news flow. So figure out what you want to do. What are your goals? What are your investment goals, your savings goals, your debt reduction goals, your educational goals, your

career goals, and work towards that. Worry less about what's happening in the broader world. Okay, so that's good advice. So stay focused. And I guess part of that, though, too, Rob, is like, it's figuring out what you want to save for, right, and what you want to put your money towards. Oh, for sure. You know, that decision has never been harder, because a lot of young people want to buy houses. And if you want to own a house, that's got to be top of mind as you build your career and you start ramping up your income um you know debt reduction that's another big one retirement i know that's that's on the mind of a lot of young people i'm surprised how much it's on on their minds and they're right to think about it but um i think you need to

prioritize and if homeownerships uh is very big you, I think you need to start thinking about maybe that is your number one financial goal after you've got any student loans paid off. All right, let's talk a little bit about housing. This is something that a lot of young people are thinking about. Where are we headed on housing as a country? I mean, obviously, it is different in different regions. But I guess generally, house is going to get more affordable for young buyers in the next few years? You know, this is going to be one of the biggest financial questions of 2024 is what happens to the housing market? You know, there's probably half the real estate investment community is thinking, of course, it's going to bounce back. You know, interest rates are going to go down.'ve got lots of immigration there's huge amounts of demand a lot of people are going to jump back in again

and the market's going to stabilize and move higher so that's one school of thought the other school of thought is that the economy is worsening we're going into most likely a recession if not than a very slow economy unemployment rate is rising there are more and more layoffs and when you combine that with the fact that interest rates, even if they come down, are still going to be comparatively high. And prices around the country, while they've come down, are still way higher than they were before the pandemic. You mix all that together and you get a market that could be stagnant or falling. And if that happens, if we get declining interest rates and prices coming down, then that will

directly and quickly improve affordability. But if we get a, you know, a reanimated housing market because rates came down, everybody said, oh, good. Now we can afford those houses. That's going to be really bad for affordability. I'm tend to think we're going to probably see some improvements in affordability next year. I just think that the biggest factor in where goes the housing market is the employment market, the job market. And if that's deteriorating, I think that really takes away some of the big support for

higher housing prices. And I guess, when will we know how that shakes out? Like, is this the next six months, the next year? Yeah, I think the next six months. I think we're going to see very quickly in 2024 how things are going. It just seems like everything's slowing down. You know, we had this like binge of spending and of high demand for things in 21 and 22. Houses started to taper off last year. I just think that we're retrenching on everything, even going to restaurants and going to concerts. That's going to be cut back, too. That's my prediction. This is not very rosy, I will say, Rob. This looks like some pretty dire things to think about here in a way. Yeah. You know what? It is a it's a tough time to be graduating. I mean, it's not the worst time, but it isn't it

isn't quite as good as it was. The job market wasn't quite as good as it was. But you know what? If we can just get through this little period of transition, you know, the economy is going to trend higher again. It's like we just have to work some of the kinks out and things will get better. They always do. Okay. That's good to know that there is some hope on the horizon. It might be a difficult period here. There's never not hope.

But there's hope. That's good. Okay. Well, let's actually talk about some things that could be part of the solution. So the government knows that people are struggling to pay for housing, especially. So what are they doing on that front? Well, they're doing a couple things. One, they're trying to very gradually and not as forcefully as some might want, curb this idea that housing is an investment. And so people should own properties. It's not so people can live

in them but so that people can rent them through airbnb or as landlords with expensive rents they're trying to turn housing into less of an investment phenomenon and more of a traditional living phenomenon so they're trying to reduce the rewards of investing in real estate i mean one of the things they could really do that i think would really curb prices would be to tinker with the fact that you don't pay tax when you sell a principal residence. If they were to somehow amend that, perhaps reduce that tax benefit a little bit, I think all of a sudden the housing market would cool down. And, you know, by the end of the day that was announced. Another thing they're doing is they're trying to get more houses built. And this is really important. I mean, people, people I think overestimate how important supply is I think demand

is way overheated and that's part of the reason why housing so expensive but we do need more houses there's no question about it and the government is doing its best to get more houses built they're providing federal government land they're taking the GST off of new home construction these are these are measures that are encouraging construction of homes and you know what there actually are a lot of homes being built in Canada right now it's the rate of home construction is a little higher than you would think given the state of the economy so so there's that and also the government created the first home

savings account which is a good way for young people to save for houses but basically by and large waiting for the people to save for houses. But basically, by and large, waiting for the government to fix this is kind of hopeless. I mean, what we need is basic ground level economics to turn in the favor of buyers. We need lower interest rates and we need some kind of pullback on prices. Okay. Rob, you mentioned something there that I want to come back to. You talked about the first home savings account. Can you just describe, you know, what is that? And, you know, is that pretty much where young people should be putting their money if they do want to own a home at some point? You know, the first home savings account is like a hybrid of TFSAs, tax-free savings accounts, and registered retirement

savings plans, RRSPs. You can put $8,000 a year into an FHSA, up to $40,000. The money appreciates and compounds tax-free. You can withdraw it tax-free. And when you make a contribution, that's tax deductible, like with an RSP. So really it's got all the best features of RSPs and TFSAs. And what I would suggest is that anyone who has a realistic thought of buying a house, and even if you're not sure, you think most likely not, but it's still remotely possible, get yourself an FHSA, put money in. If you never buy a house,

you just move it into your RRSP. And so what you've done is you've actually done some retirement saving there. So there's really no bad outcome from this. And if you do buy a house, it's a foundational way to build up your down payment. And if you're good at investing, and you let this thing run for like five, seven years, and you make like five, six, seven, 8% on an average annual

basis, that's all tax-free gains. And now you pull it out tax-free and you use it to buy your first residence. It's really, it's not a difference maker, but it's still a good thing to do. What about those of us who are renting? So let's zero in on the rental market here. Is there any hope for renters who are really so let's zero in on the rental market here is there is there any hope for renters who are you know really financially stressed and anything kind of coming to help ease that pain renters are um the biggest conundrum in personal finance today like how to help the renter i don't know i really don't have any there's no master stroke i can tell people who want to buy houses stay patient build your down payment, work

on your career, make more money, save, save, save. And eventually you'll have a down payment. But a renter, I don't know the, I don't know how to go and like bend the economics of this situation back down to benefit renters. There's a shortage of housing. There's a lot of landlords who are up to their necks in debt. And the only way they can make their mortgages is to raise your rent it's a bad situation um the one piece of hope i can offer is that if we remember back to the pandemic a lot of people were moving out of their rentals and demand for rentals

cratered and what happened landlords are going wow i really need to do something to keep my my tenants and they lowered rent and they became all of a sudden very nice and uh and approachable and willing to negotiate things and if a recession happens and all of a sudden the rental demand slackens off you're going to see landlords are going to have to do something to keep people in their units and that's going to change things and i think that may curb the level of rental increases. It may allow some leverage for renters to negotiate things once again, but that will require sort of a slower economy that, you know, we don't want the slower economy, but there will be benefits when it happens. But we've got rental inflation that is out of sight. We need more regular rental

buildings built, you know, like the apartment buildings that were built in the 1960s and 1970s. And they're rent protected in provinces like Ontario. They're great places to live. But they haven't built any of those in 30 years. And the rental units they're building that I've come across are all luxury rental where downsizing boomers are expected to live or well-off professionals. So I think the construction, I know the government's trying to get more purpose-built rental built and a recession might help. But right now, it is a tough squeeze renters are in. And I think it's a worse problem than expensive houses. Wow. Okay. So what if you are renting and you eventually do want to get into

the housing market, you eventually do want to get into the housing market? You eventually do want to buy. How do you know when to make that transition? Like when should you start putting money away for that down payment? Or like, I guess, how do you balance putting money away for the down payment versus paying your rent? Okay. If you are up to your neck in rent and you want to own a house and you're thinking, I am not getting any traction saving because my rent is so high. I'm going to offer up two options and you're thinking i am not getting any traction saving because my rent is so high i'm going to offer up two options and they're not great options but they do work one get some roommates move somewhere where you have roommates and you're having or quartering your rental costs

two if it works for you and you and your family move back home even if you pay your parents some token rent you'll be saving a lot of money i would never have proposed those sorts of measures even a few years ago but we have to be realistic now with the way rents are the only meaningful ways to cut your rent are to bring other people into the situation as roommates or to move back home or move further away move to a smaller town but those are like the worst i mean like if you're renting you don't want to rent like a one-hour commute or two-hour commute from your work. That's for homeowners. If that lets you afford a home, maybe that's permissible. But for young people, you know, living the kind of lifestyles they want to live, I don't think a long commute every day

is in the cards. So that leaves roommates and moving back home. Can you remind us, Rob, like how much of our income should we be spending on housing, whether that be rent or a mortgage payment? What's the breakdown? Well, I would say 30 to 40 percent of your gross income. But I mean, that's a rule that's in an ideal world. In today's world, people are spending 40 and 50 percent of their income on their housing. And I know there's not much left.

But I mean, you've got to survive. And if that's what you're doing, I'm not going to tell you, you're doing the wrong thing. You got to get your rent down and start saving more. I'm going to, I would say, look, you've got to think about, that's fine for the here and now,

but eventually you're going to want to start building up savings and assets. And how do you do that? If your rent's so high, you're going to have to look at other things. We'll be back in a minute. What's happening in the job market today, particularly in Canada? And I guess, how does that affect your personal finances as a young adult starting your career?

You know, I think that, you know, 10 years ago, maybe even five years ago, careers in the job market were not something that I really thought about much in terms of personal finance. But I've come around to the conclusion that your career is one of your biggest levers in improving your personal finances. You know, we've come to a point where with inflation and high cost of living, everybody's cut as much as they can cut. So how do you increase the income side of your life? That's your career. And that's what i think everybody's got to be thinking hard about right now and you know i i think that you know the job market today is still not too bad you know it's it's in much better shape than i think it was for the most of the past 10 years leading up to the pandemic it was tough for young people to get a career building first job these jobs are out there but they were hard to come by. There were a lot of internships. There was a lot of hoops you had to jump through, lots of contract work, the gig economy and all that. And then in 2021, 22, we had a complete reversal of it, the likes

of which most people have never seen in their lives, where employers were desperate to get people to come work for them, offering unheard of perks. That's cooling off fast right now. And we're starting to hear layoffs in tech and in finance too. So I think the job market is cooling down. And I think some of the old challenges and difficulties are coming back in terms of finding permanent work as opposed to contract work. Okay, Let's talk about saving here a little bit, Rob. So let's say you can start to put some stuff away. I guess, what is the first thing that young people should be saving for? Obviously, it differs from person to person, but is there something that should be top of mind that you should be putting your money towards?

Yeah, there is. I think you need an emergency fund. Now, I say emergency fund, it's kind of a term that people go, oh, yeah, yeah, yeah, Fine, thanks. And they forget about it. But, you know, I think one thing we've learned in the past few years is that emergencies do happen, not just in your life, but in the economy. And when they do, it's great to have a couple thousand dollars parked in a high interest savings account that you can use if you're a gig worker and it's extra long until your next contract comes where you've got a couple months rent put away if you're in any situation it never hurts to do that and here's a piece of good news for you interest rates are high and we often talk about how that's such a burden on bor on borrowers but for savers it's outstanding you're getting the best rates in decades uh there are alternative

banks out there offering four percent on your savings. That's risk-free 4%. There are savings products for investors that will get you up closer to 5%. So there's many great places to put your money and earn a decent return. You're getting rewarded for savings in a way you haven't been in years. Even with the inflation rate came in, I think yesterday it came in at 3.1%. If you can get 4%, you're even beating inflation, which is pretty good. So I would say first, think about having an emergency fund, like one, two, $3,000, as much as you can put away in there. Think in terms of one or two months rent plus groceries, that sort of thing. And then from

there, it's, do I want a house? Do I need to start building up my house down payment? Do I want to do retraining? Do I want to take a sabbatical year? Do I need to start building up my house down payment? Do I want to do retraining? Do I want to take a sabbatical year? Do I want to get a master's degree? Do I have other goals that haven't been specified? I find younger people are more wired into near-term goals than older generations were. Like, you know, you go back to boomers,

they would have said, what are you saving for a house and retirement? But younger people now think I might want to do, I might to travel for a year so how would i fund that would i if i put away money every month i might be able to sort of cover myself off for a six-month trip i might want to upgrade my education all that sort of thing so the emergency fund is for the here and now then you think about your near-term goals maybe your travel your uh your education and of course retirement uh that and I should say houses and then retirement. I mean, conventional personal finance says you must start saving for retirement at a

very young age. There's a very good payoff for doing that, but you can't do everything. And I think if you had to push off retirement a little bit, you could do that. Well, this gets into my next question, actually, about kind of where to put some of that money that you have. So we talk about, should it be in an RRSP, a tax-free savings account? I guess, what are the things that someone needs to think about in order to make the decision of where to best put that money? Your emergency fund should go into a high-interest savings account. It could be a TFSA, or it could not be. I mean, most young people haven't maxed out their TFSAs. The beauty of having your savings in a TFSA is you get your 4% and it's not taxed. So you're getting the full 4%. That's great.

If you're saving for a home down payment, it could be an FHSA, it could be in a TFSA. TFSAs are also good. I think you could consider them your all purpose for everything savings fund because you can take money out of them really easily. And then you can put it back. So I mean, I think if, you know, assuming that we're all mature here, we're not going to build up a bunch of money in a TFSA and then blow it on something silly. I think that TFSAs are great for especially for young people, you can't really go wrong using a TFSA. RRSPs for retirement. People sort of think of RRSPs as, although it's a retirement savings mechanism,

they think, well, the reason you contribute to an RRSP is to get a tax deduction, which is great money back on your taxes, but you're going to pay that tax money back when you withdraw money from your RRSP in the future. So it's not really the great deal you think it is. RRSPs, I think, are strictly for retirement. Yes, you get a tax deduction, but don't contribute

on that just because of that. Think about allocating your money for retirement, going away for the long term, and I won't be touching it. That's where RSPs are good for. Okay. I want to ask you about investing too, because we often hear that it's good to get into investing as soon as possible because we know the gains are over the long term, right? So should people in their early 20s be focused on starting to invest as well? I think they should, but I have to offer a big caveat because if you're doing anything with your money in five years or less, don't invest it. The stock market may give you a great return on it or it may chew your money to pieces i have personally been doing my

job and i'm watching that stock market lose like 30 in a short period of time so think about that you've got this money saved and you've you're it's so hard to put money away and you've got it in there and you got great returns from the stock market for six months and then the market crashes and then it takes a years to build yourself back up to where you started i say skip that experience and keep your money in high interest savings products for money that you're going to need for less than five years five years to 10 years plus then you can invest it in i would draw your attention to low cost etfs exchange traded funds and that sort of thing keeping a long-term horizon not freaking

out if your money goes down after 18 months, because you've got the long-term in mind, five to 10 plus years. I would say 10 is better. And you're going to have that money in for a long time. And that way, all the ups and downs in the stocks market will leave you with returns, probably five, six, 7% in that area on an average annual basis. That's sort of a realistic. And I know young people sometimes think that's hardly worth the trouble. I want home runs.

I want 10%, 20%, 30% gains. And you gravitate towards investments that can provide that sort of thing, but they're hard to find. And I know all the stuff that worked in 2021, that incredible year when everything went up, that was the GameStop year and the crypto year. It all basically fell back to earth and it hasn't been got back up off the earth since then.

So be super careful about making big gambles for big gains because they, you know, there's a weird effect in investing where you often have luck on your first foray into aggressive speculative investing. But then after that, it gets way harder. So be careful. I think an exchange traded fund tracking the S&P 500 or the S&P TSX composite, if you put your money into that for 10 years, I'm pretty sure you'll have a really good result. I wonder, Rob, what are some of the things that young investors get right that you've seen? And I guess what are some of the things that young investors get right that you've seen? And I guess, what are some of the mistakes that they can sometimes make? I see a lot of interest in ETFs, which is great, low cost investing products, a real foundational smart person's way to get started in investing. I know they're interested in trading apps like Wealthsimple's trading app,

where there's no commissions to be paid. And I think that's great. I think you can buy sensible investments through that app. And because you're not paying any trading commissions, all your money is going into the investments. You're getting fractional shares. And I find young people are fairly savvy about the stock market and investing. They understand the risks. They sometimes get carried away with the idea of accepting higher risk for higher returns.

I wish they wouldn't be quite so aggressive. So there's that. And the mistakes are just reaching too far too high for home runs in their investing, sort of believing stories that they're told about how great certain things are. And they're working in the near term and you just get so excited about it, you want a piece of it. But those things that work really well in the short term and that promise outside returns,

they're almost always built on air, and they will almost always disappoint you. What is something that you wish you knew about finances when you were maybe in your late teens, early 20s, something that you didn't know, but looking back, you really wish you did. I wished I had started investing at a bit of a younger age.

One thing, lesson I absorbed and followed, and I'm really grateful I did, is I avoided debt. But I didn't really save very much. I kind of enjoyed myself. I liked cars and trips and all that stuff. And I wasn't a great saver. And then I wasn't a great investor at a young age. So it took me a little while to get to hit my stride with that. I mean, I became a personal finance columnist in my 30s. And prior to that,

I was no virtuoso at this sort of thing. I had to learn, learn on the fly. And anyway, maybe that gives my column some relevance to you because I had to discover it. And I'm going to help you do the same thing. All right, Rob, thank you so much relevance to you because I had to discover it and I'm going to help you do the same thing. All right, Rob, thank you so much for being here today. Glad to do it. That's it for today. I'm Mainika Raman-Wells. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin.

David Crosby edits the show. Adrian Chung is our senior producer, and Angelo Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.