The argument for caution – for handing onto those excess savings – is tied to the risk of a recession that drives up the unemployment rate while also limiting hours worked, raises and bonuses.diego_cervo/iStockPhoto / Getty Images
One of the big economic questions right now is whether interest rates will fall fast enough to keep us out of a recession.
Odd as it sounds, it’s also time to discuss whether lower rates will reignite the housing market, send stocks higher and fuel a spending binge by well-off households. More than ever, Canada is a country of economic contradictions.
While many households are struggling just to pay the mortgage or rent plus groceries, others are insulated from these problems by high incomes and savings built up during pandemic lockdowns. The prospect of these savings being spent is getting talked about more and more in financial circles.
Recently, the daily update from Scotiabank Economics said pent-up consumer demand and savings are ready to be unleashed by falling interest rates. Lower rates make it cheaper to borrow to invest, and they also dissuade investors from putting their money in safe spots like savings accounts or guaranteed investment certificates.
In another recent note, CIBC Capital Markets identified $200-billion in “excess savings” and asked if some of this money will find its way into high-yielding dividend stocks.
For the better part of the past two years, we’ve been able to keep money safely in savings and earn returns of 4 to 5 per cent or more. These returns have already fallen significantly, and more declines are coming as the Bank of Canada reduces its benchmark rate. If you’re in solid financial shape, now could be a good time to move savings into an investment of some type.
The argument for caution – for handing onto those excess savings – is tied to the risk of a recession that drives up the unemployment rate while also limiting hours worked, raises and bonuses.
Dip into your savings if you have them and feel optimistic about things, but don’t drain them down to nothing. The key money lesson of the past five years is that economic shifts can be swift and full of surprises. If things get difficult, there is no such thing as “excess” cash.
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Rob’s personal finance reading list
Original thoughts on making the switch from being a saver in the workforce to a retiree.
Homebuyers have a big down payment problem
A real estate website attempts to pin down how many years it takes for people of various generations to afford a home down payment in 20 large cities. One positive here is that there are affordable cities, even in Ontario, for buyers starting out in their later 20s and into their 30s.
If you’re like me in doing more and more of your day-to-day banking on your phone, you’ll want to consult this ranking of mobile banking apps. Interesting to see the big banks dominating – they are obviously sinking a lot of resources into their apps.
The big news in financial markets recently was that the U.S. Federal Reserve cut interest rates for the first time in four years. Here’s how the S&P 500, a key benchmark for U.S. stocks, has historically performed after rate cuts. Now for a tutorial on how withholding taxes can affect the dividends paid out by exchange-traded funds tracking the U.S. stock market.
Podcast fans
Subscribe to Stress Test on Apple podcasts or Spotify.
Ask Rob
Q: My grandson is turning 18 soon and I will help sign up for a TFSA. In meantime, could you recommend a good book on learning to invest for young people.
A: Globe and Mail personal finance reporter Erica Alini’s book Money Like You Mean It covers investing, plus debt, retirement, plus renting versus buying and more.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools and guides
Buying a first home? Here’s a rundown on the closing costs to expect.
In the social sphere
Social Media: A LinkedIn discussion of whether teen financial literacy is the responsibility of parents
Watch: A CBC video looks into the question of whether a university degree is still worth it.
Money-Free Zone: The “it” guy in indie rock today, MJ Lenderman, has a new album called Manning Fireworks. Lenderman is the real deal – nasally vocals, a slightly dazed take on life, fey song titles like Joker Lips and killer guitar hooks on songs like Wristwatch.
More PF from The Globe
- GICs are not the darling they used to be - except in this case
- Her husband collected CPP for only seven years – where did the rest of his contributions go?
- New mortgage rules will significantly lower down payments on properties costing $1-million or more, guidance shows
- Renting is often a better deal than buying. That’s because of how expensive it is to own a home
