Financial Literacy Month special: Debunking 7 myths

Sébastien: Welcome to the “In Your Interest!” podcast. My name is Sébastien Mc Mahon and I'm here for a very special episode on financial literacy. And this week we welcome our colleague Jennifer Boudreau, an education strategist in the Group Savings and Retirement sector, to talk about myths related to finances. So, hello, Jennifer!

Jennifer: Hi, Sébastien! How are you?

Sébastien: I'm good. How about you?

Jennifer: I'm fantastic.

Sébastien: It's great to have you here. And it's great to be discussing myths, because there's all of those little elements that people take for granted. But there are a lot of myths. And here, we will be separating those myths into three financial topics. So, the first one is on debt repayment and on investment. The second one is on retirement and the third one is on age-related savings. Alright, so, are we ready to talk about financial myths?

Jennifer: I am always ready to talk about financial myths.

Sébastien: Alright. Let's start with the first theme, which is debt and investment. So, Jennifer, we often hear that debts are always bad and we should always avoid them. What would you have to say about that?

Jennifer: To a certain extent, that can be true in general, but in good financial health we prefer to have as little debt as possible. Debt can be used strategically, actually, to achieve financial goals. For example, taking out a mortgage to buy a house can be considered a debt. It is a debt, but it can also be an investment in an asset that can be potentially increasing in value over time. The key really is to understand each type of debt, that's really important—not all debts are equal—but also their implications, their benefits and their risks, and to manage them properly and wisely. It's also vital to have a realistic repayment plan for each debt, not just taking on a bunch of debt without having a strategy thereafter.

Sébastien: Yeah, you don't want to keep debts forever.

Jennifer: No, absolutely not.

Sébastien: So, I completely agree with you and I would add that sometimes it's even necessary to go into debt to save. You were talking about real estate, but, you know, putting money aside for your children in an RESP, taking on debt to go back to school… it can be considered “good debt” because you're invested in your future.

And even, so, you know, maybe I could add another myth here. The household debt figures in Canada. You know, the fact is that the proportion of debt to disposable income in the country is 176.4%, very precisely, with the first quarter of 2024. So, in other words, there was $1.76 of debt on the credit market for every dollar of disposable household income. But I would say that this is a large number, but this is in line with what we see in other, maybe Scandinavian countries that have a similar socioeconomic system as we have. The debt is a stock, the disposable income is a stream of revenue. So, the comparison here doesn’t make that much sense. But, you know, we live in a country where we pay for a social net, which is very generous. We pay for that through our taxes and those taxes are deducted from the disposable income. So, in countries like Canada, like Scandinavian countries, you will tend to have more debt because it influences your behaviour. When you know you don't have to save a ton of money to pay for, let's say, you get cancer when you're getting older or paying for your retirement, you know you have to pay a fair share by yourself, but you still have the social net there for you. So yes, be careful with the kind of debt that you carry on your books. But I think there's a myth there to say that, you know, Canadians are so indebted and it's a time bomb. I would say that this is another myth that I would add to the list here. So, I don't know if you agree with this?

Jennifer: I mean, I think the answer to that or part of the answer there is education. You know, my role is an education strategist, and you have to inform yourself on the type of debt that you're taking on. They're not all equal, like you just said. Some have pros, some have cons. Know what you're getting into.

Sébastien: Yeah, exactly. And if you need to buy a house, of course there's going to be debt that's going to be involved in that. But if you have to go into debt to pay for the grocery bill, then you have some big issues.

Jennifer: Exactly.

Sébastien: All right. So, myth number two: we often hear that buying a house is always better than renting when we're talking about investing. Is that true?

Jennifer: This is a very interesting myth because it does raise a lot of questions. In short, the answer to that is no. Or some may say it's no. Buying a house isn't always a better investment. I think there's a generational piece here that, you know, depending on who you speak to, they would answer that differently.

In practice, it really all depends on what you're looking for, what your desires are, what your plans and motivations to put money aside are. There's a financial columnist, Stéphane Desjardins, who quotes: “Rent is the maximum it will cost you to house you, but a mortgage is the least it will cost you to house you.” And to a certain extent, he's absolutely right, because owning a home comes with so many extra costs like property taxes, maintenance fees, notary fees – and I'll speak for myself – the amount of money I spent this weekend on decorating my house for Halloween.

Sébastien: Yeah…

Jennifer: You know, you can't not take it into consideration. Buying a house comes with, again, a lot of responsibilities, but also unforeseen events. You know, the best planning is planning for the unforeseen. So, if something breaks or the roof needs changing, no matter how many times these things come into play, you're still the one that's responsible. And you have to answer that call, if you will, to fix those things.

Stéphane Desjardins also goes on to say that, you know, statistics show that it would be better to rent a home and invest the difference between the rent and the cost of a mortgage in the financial markets to get a better long-term return. Now, again, those are the best laid plans. In reality, what happens to a lot of people is consumption comes into play before saving. So even though they have potentially the capacity to save more, the difference at times is not saved, but rather reinvested in things like expenditures, but they're not always saved in reality.

Sébastien: Yeah, I agree. And you know, I was looking at a study from the newspaper Les Affaires, which is a newspaper that we have here in the province of Quebec, and they use the example of buying a house that is worth about $522,000. So, they estimated that the monthly expense would be about $3,400 for a 5% mortgage plus municipal taxes. So that's the monthly cost: $3,400. Assuming an annual compound return of 3%, which is quite generous, the same house will be worth more than $1 million in 25 years.

Now, according to a PWL Capital study conducted in 2022, the annual return on a house after inflation, taxes and repair costs will be closer to 1% over 20 years. So, by way of comparison, if instead of buying this house, the buyers had chosen to rent the average apartment – and we're taking Montreal figures here:  $1,600 a month is the average rent – and invested the difference, i.e. $1,800 a month, in a mutual fund, the return will very likely have been several tens of thousands of dollars more than the increase in the value of the house. So, think carefully before buying a property. You shouldn't always think that it's the best investment to make. And, as you said Jennifer, you need to take the time to ask yourself about your desires, your plans, and your motivation before you start to save and invest.

Myth number three now, on the next topic of retirement. So, is it true that government programs will be enough to cover your needs when you're retired?

Jennifer: Oh, I completely disagree here, unless you have an exceptionally reasonable lifestyle. But for most Canadians, when we go into retirement, the amount of money that is going to come to us from public plans will not be enough to maintain our standard of living and “maintain”, here, is really the word. On average, a Quebecer retiring at age 65 will receive about $26,400 a year from government programs. For most people, this amount is clearly insufficient to live comfortably and retire and meet our basic needs. So, it's really essential to be able to bridge that gap with things that you have from your work, or simply putting extra money aside.

Sébastien: And we often hear that you need around 70% of your annual after-tax final salary to maintain your standard of living. We know that government programs rarely are enough to cover that, but would you agree with that figure?

Jennifer: 70% is a good figure. Again, it goes back to having an honest conversation with yourself as to what you expect out of your retirement. Yes, there are certain sources of income that are not going to be there, but there will also be certain expenses that also won't be there. Again, it depends if you plan on moving, let's say, to Europe and eating out at the best Michelin star restaurants, well then 70% maybe is nowhere near what you need. But if your idea of retirement is moving to the country and living off of your garden, then maybe 70% is the right number for you. There is no right or wrong number, and you cannot compare yourself to your neighbour or your friends. You must take into consideration what YOU want for your retirement.

Sébastien: Yeah, so you need to have a plan, and you need to have it early enough to be able to realize that plan. So, while we're talking about earning enough money to sustain retirement plans, is it true that we spend less during retirement so we don't need a lot of money? So, the fourth myth will be here: “I'll just spend less in retirement, so I don't need a lot of money.” So, what's your take on that?

Jennifer: Well, you know, it's true that in some areas of life we tend to spend less in retirement, but in other areas it will be the absolute opposite. And it's true that people will spend more in retirement. For example, you can expect to have fewer work-related expenses such as QPP contributions and professional or trade union dues. You'll also pay less taxes in theory because you have a reduced income, but family expenses should also fall, since generally children of retirees are more financially independent and have left the home.

But on the other hand, spending on health care, spending on certain insurance premiums and social activities could increase significantly. So, it's important to draw up a realistic budget for retirement based on your plans, once again, and your aspirations, and to update it regularly. It's not something that you do right at the onset of…right before you turn 65. It's just like your budget now. It will ebb and flow in time, even seasonally. So, you have to take all that into consideration.

Sébastien: Yeah, very important points here. And also, don't forget that life expectancy increases as we move forward in time. So, you need to take that into account when you're planning your retirement. And with increased life expectancy comes a longer retirement period, of course, which requires you to have income for more than 20 years if you retire at 65. So according to the Quebec government, when they look at the stats on longevity, they see that a 65 year old now has a more than 3 in 4 chance of reaching 80, a more than 1 in 2 chance of reaching 86, and a more than 1 in 4 chance of reaching 92.

And I would add another layer on top of that. The odds that at least one person in the couple lives older than 80, 86 and 92 years old, are even higher than that. So, you also have to consider the time value and make sure that you don't outlive your money here.

Jennifer: Absolutely.

Sébastien: So, myth number five, and we're entering our third and last theme: age-related savings. Jennifer, can we be too young or too old to save for retirement?

Jennifer: You can never be too young or too old to save. Don't ever get discouraged. So of course, it's better to start saving as early as possible for a number of reasons, including compound interest, which is interest that's earned on interest in your savings. But what's more, it helps you realize the value of money and establish good financial habits, which we're always trying to establish at an early age. And that will probably last throughout your life.

Sébastien: Yeah, and I would add that investing at a younger age and for the long term, that's how you reduce the impact of market fluctuations. Because the odds of having negative returns in your portfolio after one year, two years, you know, it's not zero. They're small, but they're there. If you look forward 5 years, 10 years, 20 years, the odds that your portfolio loses value are pretty much converging towards zero.

Jennifer: Exactly. And on the other hand, even if you're relatively close to retirement and haven't had a chance to start saving yet or haven't saved a lot, it's not too late and you shouldn't get discouraged. It's worth getting started as soon as possible. Every dollar counts. And don't hesitate to call on a professional to help you set up an effective strategy. You know, you just mentioned it: the life expectancy of people is extending all the time. So, at 65, once you retire, I think there's a misconception as well that your money stops working for you. It doesn't. It continues to work for you. So, it's important to start saving it. By putting in place an optimistic but realistic budget and financial plan, you can lay a solid foundation and get closer to your retirement goal, even though you're already in retirement.

Sébastien: Yeah. So having a plan again, that's always the key. Alright, so, myth number six: if we want a solid basis, should we wait to have a higher salary before starting to invest?

Jennifer: It's not really a good idea, no. Even though we know very well that in many cases it's very difficult to find a little money to put aside. Obviously, you have to prioritize essential day-to-day expenses such as housing and food. However, in the vast majority of cases, by drawing up a budget and seriously analyzing your expenses, you can find at least $5 to put aside per pay. For example, consider whether you could save on your electricity bill, monthly subscriptions, grocery bills or restaurant expenses. Those are usually our general culprits where we add a little extra spending.

It's also a good idea to set up a direct debit or even payroll deductions if possible, going back to establishing those good habits. That way you don't have to think about it too much and because the money “isn't available”, you spend less. It's also very advantageous to save tax free. So, you may be pleasantly surprised by the tax refund you get.

Sébastien: Yeah, I agree. And the payroll deduction I think that's always the key. When you have a raise at your job, you know, just saving automatically a part of that. It can compound through time. It makes miracles. And, you know, there's this quote that we like from ÉducÉpargne that says that when it comes to budgeting, you should always start by paying yourself. So, as a rule of thumb, they recommend setting aside 10% of your gross income for savings. That's a high bar, but still, if you can reach that at some point in your life – maybe you'll be in your 40s when you’ll reach that – but at least that's a very solid habit to create.

So it's not always possible, it depends on the age at which you started investing, or saving rather, but as you said, you can always find $5, $10, $20. I mean, you have to respect your limits and adapt this rule to your situation, but it's still a good target to set yourself to start on a solid path. Maybe now the last myth that we'll cover: can a high salary guarantee long-term financial security?

Jennifer: Oh, I wish it would, but unfortunately another myth that is not true. So of course, having a high salary can help you put money aside. But again, you still need to have the discipline and good financial habits. Nothing beats a good financial habit. So, a high salary doesn't necessarily mean you have efficiently or effectively money that's available for management or to put aside.

Someone who earns a lot of money may well be living way beyond their means and accumulating large debt. You know, your standard of living, if you maintain your bad habits, even with your increase of salary, you're just maintaining a bigger amount of debt, potentially. Long-term financial security depends really on a number of factors such as managing personal finances, investing, planning for retirement and building up savings, so even with a high salary, a person may not be financially secure if they don't make the right long-term financial decisions.

Sébastien: Yeah. And you know, the inclination sometimes could be that: “well, now I have a higher salary so I can sustain a higher level of debt.” And, you know, you never know how life happens. You know, it can be a life event like a divorce, you can have, you know, illness or whatever. So, it's always important to make sure that you stick to the plan, whatever your income is.

And, you know, I would add that someone who has a high basic salary, but few or no benefits will have to plan for additional expenses which require greater financial discipline, especially when it comes to building up savings for the future. So that's why more and more companies are talking about total compensation. So total compensation is not limited to basic salary. It also includes other forms of compensation such as fringe benefits, insurance, paid leave, stock options, pension plans, bonuses. And you know, the list is long. So, all of these criteria need to be taken into account to truly assess a person's compensation. And what's more, pension plans alone are a determining factor of long-term financial security.

So that concludes this week's episode on financial literacy. A big thank you, Jennifer. Very insightful.

Jennifer: Thank you so much, Sébastien. My pleasure to be here.

Sébastien: Yeah, it was a great conversation. I mean, everyone listening to that, I hope you got a little something. I hope you have a few action items here. And don't forget that it's always important to ask questions when you're talking about your money, especially when it comes to your overall financial situation and your plan all the way to your retirement. So, thank you, everyone. Thank you to all of our listeners and we'll talk again next week.

Ashleay (voix préenregistrée):  Loved this podcast? Want to know more about economic news? Follow our “In Your Interest!” podcast, available on all platforms, visit the economic news page on ia.ca or follow us on social media.