Are Canadians Money-Stupid?

{60 Comments}

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If you’re the kind of person that becomes mindlessly outraged by inflammatory statements, this probably isn’t the article for you.

As Robert Frost said: “Education is the ability to listen to almost anything without losing your temper or your self-confidence.” I have a great deal of faith that my readers are of a particularly educated and self-confident persuasion.

No-Tear Shampoo

I recently caused a stir (as I’ve been known to do from time to time). It was on another blog that I read daily and enjoy called CanajunFinances. The blog’s author BigCajunMan shared a rant about Canadians’ increasing use of high-interest tax refund anticipation loans. Rightfully so.

In response, I asserted that Canadians are stupid about money. Specifically I said:

I think you’re dancing around the primary reason that this scheme thrives in our economy: the average Canadian is stupid about money. I could point out other evidence such as the growth of payday loans, the prices that people are willing to pay for crap shacks, and the debt:income ratio (which is now higher than in America).

Let me be clear: I don’t think every last Canadian is stupid about money. In fact, as somebody who takes time to read personal finance blogs, you’re probably much smarter about money than the norm. Further, when I use the word “stupid”, I mean its actual definition.

stu·pid

  • Slow to learn or understand; obtuse.
  • Tending to make poor decisions or careless mistakes.
  • Marked by a lack of intelligence or care; foolish or careless: a stupid mistake.
  • Dazed, stunned, or stupefied.
  • Pointless; worthless: a stupid job.

When I say “money-stupid” I mean #1 - #4 with an emphasis on 2. As a nation we’ve been very slow to learn and understand money. I think “obtuse” is a fair characterization of how aloof/cavalier/negligent our approach to debt is. Clearly Canadians have, on the whole, tended to make poor decisions and careless mistakes. We’ve definitely been foolish and careless. In fact, you might say that we’ve been dazed/stunned/stupefied. Actually, if #5 means that Canadians are money-impotent, then it’s probably accurate, too.

As you can see, the actual definition is pretty far-off from the straw man definition assigned to my words that garnered mindlessly offended reactions.

Also, I guarantee that if I’d asserted “Americans are money-stupid!” that nobody would have taken offence; I probably would have gotten a few pats on the back. Canada’s biggest resource besides oil is its hubris. Does pride come before the fall or after? I totally forget…

The next day, BCM wrote an impassioned piece saying that Canadians are not financially stupid. The title says that the article “asks” whether Canadians are financially stupid, but the article treats the answer as a foregone conclusion. My assessment is deemed similar to an opinion from your kooky Uncle: crass and inaccurate.

Crass? Yes. It’s kind of my thing.

Inaccurate? Hardly.

On this piece I clarified my thoughts with the following comment:

The “hold Cdns by the hand and whisper in their ear that everything will be OK” method has failed.

The Wealthy Barber was a great book. Not perfect, but still great. If the two+ million Canadians who read it had followed its advice, we wouldn’t see the proliferation of financial stupidity we’ve had in Canada. But proliferation of stupidity is exactly what we’ve gotten. Housing bubble, 150%+ debt:income, payday loans, consumer spending moving from 65% to 75% of GDP, parents not maximizing their RRSPs so they can contribute to an RESP. A large portion of people are living paycheque to paycheque. Unless you’ve got a gold-plated DB pension, statistical probability is that you are completely ill-prepared for retirement. When the housing market stops snorting coke, we’re in for a world of hurt. Most baby boomers have a massive part of their portfolio in their house. Who are they going to sell it to? The destitute, jobless Gen Y? Don’t worry, there’s a reverse mortgage scam with your name on it!

The Chinese savings rate is 35%, Canada’s is negative. The American housing market has normalized and the economy is deleveraging. If other countries are stupid with money, Canada is a special brand of stupid. And let’s not compare ourselves to the Eurozone; they’re socialist basket cases – but if you want a crystal ball on what we’d look like if we didn’t have oil…

Time for Gail Vaz-Oxlade style lectures with stern warnings and sailor-speak. If you’re in debt, it’s your own fault. It’s what people need to hear. The Baby Boomers have had everything catered to their needs throughout their entire lives so I can understand why they might need some no-tear shampoo when they hear the truth. It’s time to get real about money.

In his analysis, BigCajunMan offers these adjectives as more accurate depictions of Canadian money-stupidity:

  • naive
  • mad cap/whimsical
  • indiscreet
  • uneducated

Really? I think these adjectives are far less accurate than my choice of “stupid”. In fact, his adjectives are cop-outs.

The idea of naivety simply removes responsibility from the equation. “Oh, nobody *told* me it was foolish to take money from my RRSP for a trip to Fiji.” Come on, grow a spine and take ownership of it.

A lack of education is a weasel-y depiction that, again, avoids assigning responsibility. Being uneducated about money could be a cause of our money-stupidity but, in itself, it’s a weak argument. My grandfather has probably received less formal or family education about money out of anybody I know. Despite this, he’s one of the most money-smart people I know.

There are lots of resources out there that Canadians could use to educate themselves about money. The average Canadian has lacked the common sense to either use those resources or to apply them. I’m not sure which; BCM seems to be very confident that it’s the former. The outcome, either way, is that Canadians are money-stupid (the proof of this outcome is in the proverbial pudding; see my quoted comments for a small sample of said proof).

As a result, Canadians are either:

1) Uneducated about money and therefore stupid about money; or

2) Educated about money and therefore very stupid about money because they’re wilfully blind as to its proper management.

Uneducated? Maybe; but BCM is asserting an unproven hypothesis. Stupid? Definitely.

Side note: there’s something to be said for the improvement of personal finance education. I’d be happy to help develop some curriculum, but I doubt the Big Banks and CREA would be happy about what I developed…

We’ve got banks, payday loan stores, credit card companies, car salesmen, Realtors, retailers, etc. yelling at us to do stupid things all day. That’s still no reason to externalize responsibility. If your Realtor told you to jump off a bridge, would you? How about if your Realtor told you to buy a condo in Toronto?

If we can’t admit that we’re stupid about money, we haven’t even taken the first step toward recovery. We need to take responsibility.

If you’re going to be less money-stupid, start with the right credit card!

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Canada’s best Credit Card balance-transfer deal: Platinum Plus® - 0% interest for 10 months before fees (this deal is subject to change! Get it before it ends!!)

Canada’s best low, fixed-rate Credit Card: TrueLine MasterCard® credit card – Fixed 9.99% AIR

Canada’s best student rewards Credit Card: MBNA Rewards StudentAwards

Canada has a problem. We have become stupid about money. This was not, overall, a problem for our elders. This stupidity seems to have risen to fashionable heights lockstep with the Baby Boomers, and it hasn’t subsided.

Note there’s a theme. All of this sneaky avoidance of the adjective “stupid” is very status quo. It’s typical of the approach to personal finance that has enabled Canadians’ self-destruction. Perhaps some people would rather dance around the truth bonfire, warmed by the flames of Canada’s demise. It probably sells more books and gets more FeedBurner readers. Instead of having an unconstructive debate about the semantics of terminology, isn’t it time we acknowledged the problem and collectively did something about it?

In short: Canada is a land of very smart people who are very stupid about money.

So, let’s have the real discussion on this blog since everybody else is too scared: is Canada a money-smart or money-stupid nation? You can assert that the truth is somewhere in between, but I’ve defined the end points of the continuum and have no interest in re-assessing them.

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60 Comments… Share your views

  1. Refreshingly honest, I like a good rant, and this one is my kind of rant! :D

    • You are very gracious in debates, BCM. While this may have the perverse outcome of encouraging obstinate people like me to argue with you, it does a lot to explain your popularity and credibility. Thanks as always for dropping by!

  2. Yep! We are money-stupid! So read and do what this blog writer suggests. It will relieve your financial stresses and place you in a position to experience contentment.

    • Thanks Andrea. I should print a t-shirt that says “I am money-stupid” and wear it. Might instigate interesting personal finance conversations :)

  3. It is just so darn easy to be ‘money-stupid’. …I mean until all your debts, loans etc give you a call and you end up bankrupt. Getting all those nice things in life is really well, nice. I think they must be a heck of a lot nicer though if you are ‘money-smart’ attaining them.
    My best friend emailed me parts of an interview with Warren Buffett. At the end it quotes him saying “The happiest people do not necessarily have the best things. They simply appreciate the things they have” Canadians need to get real like Buffett. Think before you act! Am I going to be happier getting something right NOW or having a future that doesn’t include excessive debt and financial struggles? Warren Buffett still lives in the same 3 bedroom house he bought 50 years ago and I am pretty sure he’s a happy guy.

    • Exactly. When it comes to personal finances, it’s frighteningly easy to close your eyes and plug your ears — until it’s too late.

  4. Buffet also owns some seriously awesome homes in places like Hawaii.. BUT YEA. Canadians very money stupid.. especially our big banks etc… pushing us along to collapse with debt levels. I know just this summer I went to get a draft made for a new truck and financial person insisted I consider borrowing the cash so I let them go through the process but obviously didn’t in the end… heck rates ARE low.. but people today they finance EVERYTHING.. even their tax return!

    • lol Good point Sam. If I was Buffett I think I’d want a couple beautiful vacation homes too. :) Also, I laughed about the truck financial person thing. Why not let him waste his time if he’s trying to make you waste your money!

      • Financing the truck is only a stupid idea if the initerest rate your going to pay is higher then the return you are making on your money. Would you cash in shares paying a 5% dividend to buy the truck outright if you were only paying 3.5% on a line of credit to finance it? That would literally be throwing 1.5% of your money away every year.

        • Ignoring issues of whether the truck loan would be tax-deductible (very likely, it would not), can you show me a guaranteed return investment (zero-risk) that exceeds by 1.5% the rate on an auto loan?

  5. Now for an ON TOPIC Comment….

    I use a tax preparing service… BUT… the government still deposits my refund.

    I don’t give them part of my return… I pay for their service, tax preparation, with cash…

    This is only because of the complexities of my tax situation! Being a remote northern resident of Canada… I have to make guesses and estimates about travel expense, receipts what qualifies or doesn’t etc…. A second opinion is of value FORSURE, for ME because finance is not my profession.

    If I lived down south my taxes would be simple enough a child could do them.

    Jon

  6. While I think TurboTax is sufficient for the average tax situation, competent professional help for certain complicated situations is worth its weight in gold. There’s a reason that lawyers, doctors, etc. still exist despite the proliferation of computers. And they’ll be around long after computers like Watson come to market, too.

  7. What a refreshing post. Calling it like it is. I used the term “ingnorance” in one of my posts and I think “money-stupid” is bang on. But most people don’t want to hear that. They happily pay their service fees, their MER fees, their high credit card interest and forgo the opportunities to learn how to do things better. Beause that would take work and most are too busy taking little Johnny to the rink so he can become the next NHL superstar instead of sitting around the dinner table and talking about being responsible with money.

    • I couldn’t agree more; seeing the counterproductive behaviours of others is very depressing. But it’s great that other people see the importance in speaking the truth.

  8. Great article, and I agree.

    When the article said “Most baby boomers have a massive part of their portfolio in their house.”, it touched on an issue about which my wife and I have been trying to make a personal decision, and so I hope no one will mind if I ask for opinions on a personal issue. We will very soon be near the end of our mortgage term. We have relatively (at least compared to some, I guess) owing – let’s say $100,000. It turns out that between us, we have roughly equal that amount saved in various unregistered (ie. purely unregistered or TFSA) accounts (stocks, bonds, mutual funds, etc) – in other words, were we to sell them all, we could likely completely pay off the mortgage. The question is, is that a good idea?

    One one hand both of us generally believe debt=bad and so that makes it a good idea. Obviously the increased cash flow would be nice. Conversely, as the article points out, aside from some quantity of RRSPs remaining, that would leave by far the greatest portion of our overall net worth tied into our one single home, which might also be bad for various reasons. Also, it’s not like being in the market (with stocks/bonds/mut funds) at least over the last decade has been an awfully lucrative exercise anyway. So philosophically (and technical details aside, like whether we would trigger any cap gains by selling, etc) – what do you all think?

    Cheers

    • The idea of not paying the mortgage so that your assets aren’t all tied to the value of the house doesn’t really apply because you’ve already committed to paying a certain value (If you sell for a loss of $1000, you are still out $1000 regardless of how much of your mortgage is paid).

      The way I look at it is, I’m already committed to shifting a certain amount of my wealth into my house (although in some ways, it’s future wealth) so the value of the house if I were to sell it doesn’t really matter until I sell it -okay, that sounds really obvious-. Instead, I look at any money I put into my mortgage as earning 4% (my approximate mortgage rate) interest guaranteed. I can probably make more money in equities, but with higher risk.

      The last few years, I’ve put any extra money into my mortgage since I don’t expect good returns on the stock market. In the next few years, who knows?

      Hopefully, I’m bucking the trend mentioned in this blog though…. :-)

      • I think that point is not to not make a large mortgage payment–because as you mentionned the interest is guaranteed savings–but not to buy an overpriced house you can’t afford thus leaving yourself with no room to invest in savings where you could potentially earn much higher rates of return.

        This is the case in most housing markets in Canada right now. This is a really good piece on determining whether is makes financial sense to buy a home vs renting one.

      • Good question, Danno and awesome replies everybody. You’re all so civil and have clearly thought through your responses, great work.

        As you’ve noted, I’d need a ton more details to fully contemplate an answer. To give you a real answer, even in principle, I’d need to know quite a few more facts. How long until you want to retire? Do you (or your spouse) have a pension? If you’re interested, my email is timelessfinance@gmail.com. I’d be happy to hash out the details and give you an answer in a blog post.

        In lieu of giving you a solid answer, I’m going to cop-out. I think both sides of this debate have raised excellent points. I’m going to add what I think hasn’t been mentioned (sorry if it has) about each perspective. Also forgive me for sloppy writing and rambling because I’m sleepy.

        Pro “paying it off”
        - in Canada, mortgage interest is not deductible. The 4% savings is, depending on your marginal tax rate (another variable I’d need to know), much higher. Let’s say 5% (conservative, it’s likely a bit higher)
        - you will not beat a 5% risk-free return in the current environment
        - whatever housing prices do (I think they’re going to crash), whether you’ve eliminated all of your debt is irrelevant.You’ll have more or less equity but it’s irrelevant to your ability to make your payments. If rates go up, however, then your cash flow will be impacted. Whether your mortgage is fixed, and for how much longer, is key. The price drop that results in a loss of equity will probably be correlated with rising interest rates (funny how ‘perfect storms’ are actually often the economic equilibrium). Paying off your debt would protect you against such gains. If you’ve got, say, 9 years left on a 10 year mortgage, and you can pay at least $10k a year against the principal then the interest rate is not relevant to your decision. If you’ve got 2 years left on a 5-year fixed then it’s EXTREMELY relevant.

        Con “paying it off”
        - Samantha and Mr. FP were correct in pointing out that, in regard to housing, I wasn’t criticizing that people have mortgages. I was criticizing the fact that people in Canada hold the majority of their porftolio in one asset in one location in one asset class: a house. This asset does not pay a return (unless you move out), and any potential above-inflation gains are sheerly speculative. Paying off the house immediately by cashing out your other investments decreases diversification even more. Diversification is essential. It increases overall returns in the long run (it’s the only ‘free lunch’). Even in its current state, I wouldn’t call your portfolio diversified because it sounds like your home equity exceeds even your productive assets; that’s no reason, however, to make your portfolio LESS diversified.
        - cash and like-cash assets (I assume you hold some of these in your portfolio) are liquid. Your house is not as Mr. FP said. If you don’t have any other ‘emergency fund’ then getting rid of it could be absolutely disastrous. It’s a silly risk, don’t take it!
        - unless you will have $1 million in your RRSP for retirement (your age and how much you have currently is obviously relevant) or you have a defined benefit pension, then it is IMPERATIVE that you buff your retirement with TFSAs. Using TFSAs for your retirement precludes using that money now. The Big Banks love running ads that encourage you to use TFSAs as Tax Free SPENDING Accounts (“Save for your next vacation in a TFSA!”) but it entirely eliminates the real benefit of the TFSA – permanent tax-sheltered returns on all profits, and tax-free compounding of those profits. Your TFSAs are much more sacred than your non-registered investments.

        • Excellent comments, thanks. So because I like scenario-playing, here are some rough/high level numbers to work with.

          Us: Wife and I ~35, so plenty of time till retirement, two kids, oldest is 6, so plenty of time till (paid) school, both wife and I supposedly will have pensions through work, but both are DB plans and I don’t trust privately-managed pension plans further than I can throw them.
          Home: In GTA, not Toronto proper, value today approx $350k, remaining mortgage balance $100k at 4% fixed, term up in 1 year.
          Other: $90k in RRSPs between us, $40k in TFSAs, $60k in other unregistered accounts.

          So question would be, in 1 year, when the term is up, we could cash out the $40k TFSAs and $60k unregistered accounts (both are flat to slightly above cost, so no loss of TFSA room nor cap gains triggered) and pay off the remaining balance. Leaving us with one $350k home, $90k in RRSPs, and no debt.

          Right now I am leaning towards the payoff. We are only 35 – plenty of time to then redirect all the cash into savings & rebuild.

          • As others have mentioned, forget the future value of the house because you take all gains or losses regardless of your mortgage balance.

            Your choice is between paying off your mortgage and saving 4%/year (maybe less if you can get a good interest rate next year), or investing and potentially getting a higher return. And cutting out a major expense can have very interesting effects.

            My personal estimate is that our investment portfolio will give us 5%/year after inflation (some studies show 7% or more but I want to be safe). If inflation is 2%, the comparable savings from paying off your mortgage is 2%/year or less. The difference of 3-5% over 20+ years can be significant.

            But investment returns aren’t steady like mortgage payments. If you invest a lot in a short period of time (by paying off the mortgage then investing more) you’re fully exposed to what the market does in that time. If you invest smaller amounts over a longer time then you’re diversified across many different periods in the market. Some will be good and some will be bad.

            And if something does go wrong, would you rather have $90-130k in liquid assets to live off of or have that much less in assets but no mortgage to pay? How many months could you pay the mortgage out of that amount? I don’t generally like debt but once you give that back it can be harder to undo if you change your mind.

            If you have the working income to go either way for the next 20 years and you can invest well, you might do better by keeping the mortgage around for a while longer.

          • Great points, all Value Indexer.

            Frankly – and just being blunt here, if perhaps a bit cynical – 5% after inflation returns is not something I feel confident in going foward given the recent (decade) performance of my own investment portfolio. Markets are largely stagnant, so I’m not sure low-cost indexing will get you there. At the risk again of sounding cynical, I am becoming more convinced by the day that actively manged investments are even worse – nothing but a bunch of questionally-qualified “experts” slowly bleeding you to death with 2.5% MERs. I’m sure somebody somewhere is getting 5% returns after inflation, but it certainly has not been me on my own lately, and I’m becoming skeptical about trusting others.

            As to “locking up” the liquidity – could easily pay down the mortgage and then take out a HELOC, never to be used except in the event of emergency need – thus preserving liquidity. Or I could Smith it up – I could sell the investments, pay off the mortgage, take out that HELOC, borrow from it and reinvest – and now I can write off the interest. :) Best of both worlds?

          • I can’t argue with that, but I can and will spend all day buying anything you want to sell based on that perspective :) You have to do what you’re comfortable with and I’m comfortable with the idea of making good investment moves when the majority disagree with me.

            Your situation may be ideal for a Smith Manoeuvre or even an RRSP mortgage. If you don’t like paying interest or taking a risk of getting low returns elsewhere the later option could be powerful for you. Now that you mention it there doesn’t seem to be a reason that you should have a mortgage without some kind of special benefits.

          • Value Indexer: very good points. My apologies – I’d respond directly but I can’t nest responses any further.

            Danno: if you don’t already have a cash emergency fund (in a high-interest savings account) that could pay for 6 months of living expenses, I would establish this first by cashing out some of my non-registered investments.

            After that point, it’s personal preference. Why?

            1) Re: your portfolio, you definitely haven’t given yourself enough “credit” (pension credit pun intended). As a fellow future DB pensioner, I share your fears. Pensions are underfunded, there’s austerity and baby boomer retirements on the horizon. You should, however, expect something from your pension. I suspect that, for example, I may live to see the disappearance of “indexing” on my pension or a slight tightening of the formula. However, your pension plan should still be considered an integral part of your retirement income planning. Good for you for having the wherewithall to look beyond it.

            2) If your wife is in a different DB plan then chalk up another point for diversification; even still you have TWO DB pensions to look forward to which is absolutely magnificent in terms of retirement living.

            3) You’ve got 20 years til retirement (clearly you’re on your way to Freedom 55 so if you want to work longer I guess you can…)

            4) You have no other debt (KEEP IT THIS WAY)

            My personal approach would be to cash out any remaining non-registered funds and pay down your mortgage, and then to throw every extra dollar, cent, and half-penny at it. Why? “Neither a lender nor a debtor be” is a motto for me. I’d keep the TFSAs (and obviously the RRSPs) and my emergency fund. Everything else is fair game for debt repayment. I’d focus on ways to optimize net income by cutting my cost structure until I’d repaid the whole mortgage.

            Value Indexer also offers a very worthwhile strategy. Clearly his risk tolerance is different from mine. He proposes increasing your investment leverage, but investing the leverage in a set of diversified assets (rather than just your house) via the Smith Maneouvre. His strategy would reduce your taxes. Nevertheless, there is a risk inherent to any investment and the quickest way to increase risk is leverage. My concern is that, as we learned when the US Housing Bubble popped, negative returns can be correlated across asset classes.

            Then there’s a possible middle-of-the-line strategy: keeping the status quo. You’ve got a very sustainable lifestyle. Even if rates explode, your income will be able to cover it.

            What should you do? You have the benefit of free choice. You’ve earned it by being money-smart. Good work. Keep saving.

          • The SM isn’t the only alternative option, though you could say that someone who has a DB pension and job security can afford more risk. I put most of the risk in the income category so I don’t use leverage for investments.

            The RRSP mortgage doesn’t seem to be used very widely but if you give yourself a mortgage from your RRSP funds and then set the interest rate to the high end of the current range (giving yourself every disadvantage like an open mortgage to make it more expensive) you have no outside debt, a good return on investment, and a way to get more cash into your RRSP. The only thing it doesn’t solve is liquidity since you you still need to set up a new loan to get access to that kind of cash.

            I guess this isn’t related to the original topic anymore since any of these options (and the question itself) is money-smart. As the Wealthy Barber says, “Many people ask if they should pay down their mortgage or invest more. I answer: Yes, as soon as possible.”

    • Mr. Finance Professional March 15, 2012 at 1:33 pm

      Rule number of one of financial management is…..diversification.

      Keep the financial assets, if you sell them to kill the mortgage and house prices fall, your entire net worth could take a huge hit. Witness the 35% decline in US house prices – an extreme example but 15% drop is certainly possible in Canada. US house prices started falling in 2007, 5 years ago, and they are STILL falling though only slightly.

      Also, housing is an illiquid asset; that is, it is can not be turned into cash aside from borrowing against it. If you need money for anything, having all your wealth tied up in your home will not help you.

      Always remember rule #1….diversification. It is easy to ignore risk…until it materializes.

      • Thanks for the great replies. Two opposing arguments – but both completely valid points, I think, and highlight the difficulty of the decision.

        Inherently I agree with the diversification statement, and that’s what gives me the willies about selling off 2/3 of other assets to plow it all into the house (even if, as the post above points out, I’ve already committed to paying that amount). And the point about a 35% drop in housing is well taken, but let me play Devil’s Advocate for a moment and ask this – under what plausible scenario does my house price sink 35%, while the value of my stock/bond portfolio does not suffer a similar or potentially even worse decline? It seems to me that these things, while on the surface different and therefore “diverse”, tend to move in largely similar directions anyway – so it whatever calamity/reversal happens that drops my home value by 35%, that same action would most likely have nuked my investment portfolio as well. At which point, if I had chosen to pay off the home, at least I’d have no debt. :)

        Thanks for the good discussion.

        • I would pay off the mortgage. Chances are that you will not make the same or better rate after tax as the mortgage rate. It doesn’t matter what the housing market will do. You already own the home. If you sell when the value drops you would have to pay off the remaining mortgage anyways. Just be smart and use the money that you were putting towards mortgage payments into your savings account.

          • Pay off the mortgage. The previous commenters have it 100% right. There is no investment on earth that will give you an absolutely guaranteed 4% _after tax_ return on your money.

        • Danno, playing the devil’s advocate is probably my fav past time! What do you think of this plan?

          1) Sell your house into the real estate bubble
          2) Invest your equity in a diversified set of index funds (global), high-interest savings accounts, REITs, bonds, etc. (use dollar cost averaging to diversify across time). If you have a ton of equity, consider using it all to buy a small apartment building in the US.
          3) Rent a small apartment at a much lower cost
          4) After housing chills out, buy a sick downtown condo from a distressed flipper/speculator for half of the unit’s original cost

          • Sounds like a fun plan – and entirely practical for someone without two small children. Which unfortunately is not me. ;)

    • It could be a good idea if you are disciplined enough to take the money that you have been putting towards a mortgage and instead put it directly into savings. Many people try to do that but it is much easier to skip a month or put a little less away when it is not a forced payment like a mortgage

  9. Pretty sure people are just stupid in general.

    If an IQ of 100 is supposed to be the median, then that means half the population would have an IQ below 100… Yikes.

    • On the other hand almost everybody is above average intelligence. Proof – just ask anybody and they’ll tell you they’re above average. /end sarcasm

  10. I am in agreement with almost everything you say. My only suggestion would be that perhaps rather than saying Canadians (or Americans or Baby Boomers) are stupid when it comes to money, would be to say instead that they (we) make stupid decisions when it comes to money. It may be splitting hairs, so to speak, but I take much less offense to someone saying I made a stupid decision than to saying I’m stupid. I think I picked this up from some parental advice book – don’t call your kid stupid, dumb, etc, but point out that the decision they made was stupid etc. I guess my point is that if you offend people, they tend to either tune out, or get their back up and argue. If you can make the same point in a way that comes across as being less offensive, people are more likely to read, listen and consider what you say. (As an aside, I consider myself pretty financially bright, no consumer debt, decent investment portfolios in RRSP, TSFA, RESP and non-registered, as well as good savings and a small work pension adding up. However, I have made some stupid decisions in the past, so would take offense to being labelled as stupid when my net worth is actually probably pretty decent compared to the majority.)
    Just something to think about. I agree that the majority need to get smarter about money, you just have to deliver the message in the best way to actually reach people in order to make a difference. take care.

    • The last 30 years have been spent by financial advisors, columnists, etc. giving out advice in the friendly, kind tone that you reference.

      30 years later, and we’re completely screwed.

      Why?

      Those advisors, writers, etc. gave out great advice, but they gave it out in a way that resulted in the majority of people NOT listening.

      I’m trying to spread the same solid financial advice (e.g. buy term life insurance), but with a different communications strategy. Maybe mine is flawed, but wouldn’t you say doing it differently may not be a terrible idea?

  11. Great article. I was money stupid but alas had the good fortune of surviving my mistakes and equally important, learned from them.

    I enjoy a “tell it like it is” assessment of any situation, sadly I believe as you allude to, it is indeed unlikely the money stupid are here reading your portrayal of common sense. In contrast they are likely paying off their high interest credit cards with a lower interest line of credit so they can feel good about their fiscal prudence and then reward themselves by buying something special using the credit card they paid off.

    • I love the show “Til Debt Do Us Part”. Though whenever I see a family that is “paying off” their credit cards with a line of credit, I feel literally sick to my stomach. And on MANY of her episodes, that is EXACTLY what the families are doing. What is wrong with them? Can’t they do the math? And these are typically SMART people – teachers, a doctor, professionals of every stripe. The only conclusion I can come to is that these people are money-stupid. You’re also correct that most of the people who read this don’t need this reality-check. But today I got 3,000 hits which is 25 times the norm for my site. I have a lot of hope that at least one person read this and is subsequently going to make wiser choices in the future.

  12. I think he meant “indiscreet”?

  13. In reply to Danno’s question, I have a similar problem myself. I would say (but I am not an expert) that given the low interest rates etc, keep making payments for a while and keep that safety net in savings. In a few years, you could do another assessment and see if your savings now exceeds what’s left on your mortgage and decide if you want to pay it off. I personnaly don’t think that it is a good idea to clean out your savings to pay a single item, even a house. Certain things, like houses and student loans, are best paid over the years than in one lump sum that leaves you with nothing or a single thing. You don’t know what can happen to your house or to the real estate market. I never owned a house myself, so I am going to ask, can you decide to make a big payment that would reduce your mortgage, thus the interest? (That is what I did with my student loan, I paid about half of it in order to keep half my savings, and made monthly payment on the rest). Hope that helps you figure out what you want to do! But only you know your situation and your level of comfort with debts.

  14. Great article. But to me, you’re still not getting at the heart of the matter. The question is WHY are Canadians more than they earn? My hypothesis is that they’re trying to fill a void inside themselves. When I look at the lifestyle of some of my friends/colleagues, I see them: working too many hours, spending very little time with their family, and when they do, spending all that time in front of the television. This lifestyle has created a situation where people are sedentary and bombarded with messages to “consume more, it will make you happy” from the television.

    For our family, the solution was simple: throw out the television, and fill that time with family-oriented games, hikes, reading, etc…. It’s amazing how it will recharge you, fill your life with passion again, and from a monetary point of view, turn off those urges to go out and spend, spend, spend.

    Not trying to come across as smug, but I’m happy we found something that works for us.

  15. Thank you all for your comments! It’s great that you’re so aware when it comes to financial matters. If you want more advice in the future then definitely check out future posts from this blog.

  16. The messages of those like Gail Vaz-Oxlade have not been strong enough. We need to have a national discussion that is driven by people: not just banks and investment bankers trying to frighten us. “Personal finance” is just that. Personal. BUT, what I do (or not) does have an effect on the larger economy and society as a whole. If I save nothing for retirement, it is a distinct possibility that my health will be affected and I will use more health care resources. If I have purchased a home that is way beyond my means, I have also not served the greater good. Again, back to the common resources I may use more of if I cannot meet my day to day needs. Yes, it’s personal. It’s also a factor in the public as a whole.

    • Yes. One major problem that I see are the new “PRPP”s. Pooled Registered Pension Plans are a red herring in the Canadian debate about retirement. They’re an administrative trick that won’t cost the gov’t any revenue (notice they didn’t increase the RRSP contribution cap!). They’ll provide more control to banks/insurance co’s to manage even more $$$ for ridiculous fees. Just like most non-mandatory pensions, people won’t bother to opt-in, even if they’re incentivized by employer matching.

      Worst of all, the returns will suck. Guaranteed. Returns from public markets (e.g. the stock market, REITs, the bond market, etc.) consistently underperform the returns of private markets (e.g. building an apartment building to rent out, owning businesses outright, etc.). Big finance (e.g. Banks and Insurance Co.s) LOVE taking your cheap money from public markets and buying private investments with huge returns. Of course you, as an individual investor whether it’s in an RRSP, a Defined Contribution pension, or the PRPP, don’t get a cut. Only Defined Benefit pensions can take advantage of these investments for workers DIRECTLY. Sadly, most governments have been content to roll over for the pillaging of DB plans over the last 30 years, to the point that it’s now seen as some kind of grotesquely wasteful perk for government employees.

  17. Darlene Buckingham March 16, 2012 at 1:11 pm

    I would like to hear exactly what you think money is. Personally I think we have been deliberately misinformed about what money is and the result is that many people are suffering because of this. When I heard about Operation Twist that the Feds concocted I knew that money as it is today is a total fabrication with the odds on the side of those controlling it. We are living in one big casino – the punch line – we are all losing. Its time we take a look at how we live on our planet and what money really is.

    • I’d say M3, but you tell me (http://www.bankofcanada.ca/about/backgrounders/canadas-money-supply/). Are we talking about the deposit system? Money is just a representation of wealth; fiat money is the same thing except there’s nothing actually underlying it. Because it is (1) a store of value, (2) transferable, (3) easy-to-carry, and (4) eliminates the double coincidence of wants, I think it’s an important “oil” that keeps the gears of social exchange running. After all, even Marx said the infrastructure of society is the economy (and he meant that in a “it keeps human beings alive and functioning” kind of way as opposed to a conspiracy-type way, because he said the economy would remain in this role regardless of the Mode of Production).

      As for my conspiracy quackery, I’m concerned about the CMHC. If they have enough equity to back all of their loans against default (they have about the same level as Fannie Mae and Freddie Mac before the US crash), then why must taxpayers guarantee the CMHC’s liabilities?? Why won’t the government simply remove this guarantee? Let the banks manage their own risk/return relationship. Why should I guarantee that their mortgages will be profitable in perpetuity? The answer is that the CMHC has set Canada (and therefore taxpayers) for a world of hurt.

  18. Money-stupid is a good term for us. BBBBUUUUUTTT how does one get money smart when equal numbers of experts tell you to buy (or not buy) the Toronto Condo. In fact for every investment decision, you can find pros and cons all over the internet. The problem with investing is that no one can see the future.

    All you can control is yourself. If you spend less than you make and pay the least fees as possible. Then by my book you are doing good.

    The investment stuff is so subjective and as someone above posted, personal. What you call stupid someone else calls smart and the only judge is the future.

    • Ah, the dreaded “but” lol

      You’re right that if people have a large emergency fund, are saving enough for retirement, don’t have any consumer debt and have a low mortgage payment (that will stay under 30% of income even when rates triple, as they inevitably will), then they’re probably being money-smart or, at least, not money-stupid.

      “But” I draw the line at choices that are clearly money-stupid. Money-stupid choices include foolish, massive, undiversified investments. Toronto condos are one of those. The current housing market is a fool’s game; it’s a disaster waiting to happen. Housing is selling at stupidly high prices. Price:rent and price:income ratios are off-the-chart compared to historical norms and, make no mistake, just like in America these ratios WILL return to normal. It is a bubble being driven by low rates and euphoria; it’s as simple as that. The only smart investment is one based on sound fundamentals (dividends, rents, interest), rather than speculation (capital gains). Warren Buffett does this type of analysis. The greater fools are simply drawing a straight line out from past performance and assuming the trend will continue into the future. Sometimes the greater fools (aka speculators) make money, sometimes they lose. Regardless of whether it’s successful, it doesn’t make it smart. Anybody can gamble; it takes zero insight. It is not, in the long run, a money-smart way to build wealth, anymore than betting your retirement on a game of roulette or buying only penny stocks.

      The people on each side of the debate certainly have interests. However, I find it interesting that the people claiming housing is a “good” investment typically have the interest of immediate payoffs from a housing bubble: banks, realtors, speculators, etc.

      Money-smart people look at where the puck is going, just like Wayne Gretzky. Is housing going to double again in the next decade? Even though prices are more unaffordable than ever? Even though they’ve vastly outtracked rents? Our housing market closely resembles the definition of a bubble as described in Irrational Exuberence, which was a book that predicted the US housing collapse before it happened. If you don’t want to spend hours reading a whole book, I’d highly encourage you to check out http://www.pricedoutforever.com

      • I think anything beyond the things you can control are not something I can deem money stupid. It sure looks stupid to me to buy a condo in Toronto. But we are only guessing (albeit intelligent guessing) that it will end up that way.

        I would give you that people who are money-smart don’t invest in Toronto Condos, but I cannot agree that it makes people money-stupid to do so. I have been watching that darn market for shy of 3 years, and every year it goes up. If I had bought in 3 years ago and sold last year or this year, I would have made a killing. If they are doing well and making money, who am I to judge. Whatever works is my motto.

        • Speculating for capital gains is money-stupid, because it’s dependent on a Greater Fool making a higher valuation assessment at a later time. This is true of condos and gold prices. The price of a condo in Toronto does not represent its underlying value – the cash flow that an owner could earn from it. The price:rent ratio is completely out-of-whack making positive cashflow impossible in TO. Buyers are therefore speculating on price gains that will eventually collapse. This is money-stupid.

          If I walk into a casino and bet my retirement savings on red and win, does that make me money-smart? No. It actually makes me very money-stupid for taking the risk. Toronto condos are no different, except that it’s inevitable that the whole house of cards will fall at some point – the Damocles hair being cheap credit.

          Investing is buying an asset for dividends, interest, or rent. If you can make positive cash flow from a unit (in the long run and in spite of the inevitable rise in interest rates) then it’s an investment. You’re not buying to speculate, you’re buying it as an investment. That’s money-smart. Unfortunately there are no money-smart units in Toronto at the moment.

          If you’re relying on capital gains and not getting “paid to wait” on your “investment”, it’s probably money-stupid speculation.

          • I am enjoying this debate, I am learning to refine what I describe as a good investment for me. Thanks for playing along.

            Every investment is speculating to some extent, except maybe your casino example (it is all speculation =) ). You know that phrase “Past performance do not necessarily predict future results”, that is code for speculation. Dividends, rent and interest are never guaranteed, so it is speculation.

            I have been burned by a rental unit that cash-flowed like crazy and made out like a bandit on Nortel. (Talk about screwed up). I am not disagreeing with your logic but I am disagreeing with the fact that you can call someone money-stupid for doing things differently than you do. You see Toronto real estate as a peak, I see it the same way but we are not perfect and the bust may never come.

            And yes I do see the results as the final arbiter of the success of an investment. What the heck else would you use? Empirically it is the only fair bar, anything else is subjective and based more on biases than on outcomes. The casino will pay off once in a while but in the long run the odds are low that it will pay. Real estate has always had fairly high success odds. But maybe you have data that shows that when it is x% above previously set price to income ratios it is no better than a crap shoot. I haven’t seen a study like that although I have looked quite thoroughly on the interwebs.

  19. Stupid is the sneeze, but possibly the effect of a deeper cold. You’ve said it with retailers, realtors (a completely debased form) etc. etc yelling. There is a case in that Canadians, or likely North Americans, are highly suggestible to the intense saturation of ad media digging deep into some core drive of individual status- seeking behaviour. A competitive urge is apparent. The old “Jone’s” thing. Marketers keenly present these Jones’ in cars, in clothes, on beaches, with furniture and appliances and agitate the mass inferiority conflict by demonstrating that what you have now is just marginally (i.e. in the realm of attainability) deficient. And again and again until drunken with dissonance, the hapless consumer sneezes. In other words, as Joe Wood states, the masses stupidly do stupid things with money. Aghhh the middle classes make such good fodder.

    • Marketers are sly folks. The human mind is susceptible to various tactics. We’re also terrible at deferring gratification. With that said, I think it’s extremely important to maintain personal responsibility for choices made.

  20. *People* can be stupid with money.

    *You* are stupid for saying that.

  21. Hi all

    In my opinion, because of following conventional Canadian “financial advice”,
    all to many Canadians may be forced to fund their retirement with their home equity –
    assuming the real estate market holds…

    To combat this scenario, I’ve written a new report entitled,
    “The 10 Top Myths Of Canadian Home Ownership – Exposed”
    and was wondering if I missed anything…

    You can pick up your free copy at [my website]

    I would welcome your thoughts and comments.

    Cheers!

    Mark Huber, CFP

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