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When it comes to your family budget, don't follow Ottawa's example and pile on the debt

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It has reached the point where total debt repayments for Canadians surpassed the growth in disposable income last quarter, according to a recent Statistics Canada report. - 123RF Stock Photo

Martin Pelletier: What we choose not to spend money on can generate a significant form of future Return on Investment — financial freedom

When it comes to planning one’s family’s budget for the year, most of us know that it pays to save during the good times so that one is prepared for the bad.

It’s funny how this basic concept hasn’t resonated among those at the helm of our country as evidenced by Ottawa’s budget for 2019. As Kevin Carmichael put it in a column last week, “The worry is that too little is being done to prepare for an economic downturn, but that appears to be a risk that the Trudeau government is willing to take, especially months before an election.”

We’re told not to worry because our nation’s income level is expected to grow at a faster pace than our debt accumulation. But there are reasons to wonder if this will really be the case, especially given that the economy grew at a paltry annualized pace of 0.4 per cent in the fourth quarter, a far cry from the 1.8 per cent forward assumption used in the budget.

Canadian families may not have to worry about being re-elected, but that hasn’t stopped us from acting in the same fashion by allowing our level of spending to outpace our income. It has reached the point where total debt repayments for Canadians surpassed the growth in disposable income last quarter, according to a recent Statistics Canada report.

More troubling is that even during the good times, nearly one in five indebted Canadians have indicated that they may have to sell assets in order to meet their financial obligations this year, according to the 2019 Household Debt Survey, a Leger poll of 1,515 Canadians.

No wonder people are feeling anxious these days. A recent OECD report entitled “Risks that Matter” found that 50.9 per cent of Canadians surveyed are worried about meeting expenses as a short-term risk.

This isn’t to say taking on debt is a bad thing as long as it is being used to invest and generate some form of future Return on Investment (ROI). For example, having a mortgage can introduce fiscal prudence into one’s lifestyle via forced savings.

That said, what we choose not to spend money on, also can generate a significant form of future ROI — financial freedom. If we want to achieve financial well-being and the freedom that comes with it, we need to focus on the management of our household balance sheets.

Morgan Housel of Collaborative Fund summed it up quite eloquently in a recent blog post.

“Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see,” he wrote.

“A key use of wealth is using it to control your time and providing you with options. Financial assets on a balance sheet offer that. But they come at the direct expense of showing people how much wealth you have with material stuff….The ability to do what you want, when you want, with who you want, and why you want, has infinite ROI.”

In order to apply this kind of planning to your own budget for the year, start with your current balance sheet position and then calculate a future outlook based on anticipated spending rates and incomes. We would recommend stress testing these forward assumptions for negative events such as a recession or worse, the loss of a job.

The final step would be to apply all of this in the design of your investment portfolio with the goal of determining not only whether you will have enough not just to retire, but also to maintain the lifestyle to which you are accustomed. This way you can ensure you are indeed on the right path, one that will pay dividends in both good times and bad — and that’s a budget I’m sure all Canadians would endorse.

Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

Copyright Postmedia Network Inc., 2019

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