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It's Your Money  

Canadians’ financial stress continues to climb according to annual index

Financial stress increasing

On May 23, FP Canada released its latest Financial Stress Survey Index, revealing significant insights into the financial well-being of Canadians.

The survey highlighted the growing financial stress among the population and underscores the importance of financial literacy and planning.

The index is compiled annually for FP Canada by Leger and is a measure of how much financial stress Canadians face, the key causes of that stress and steps that are being taken to combat the financial stress that so many face.

I wanted to use this week’s column to highlight some of the key findings of the survey as well as discuss some steps Canadians can take to reduce their financial stress.

Money continues to be top stressor—Driven by a challenging economic environment, elevated grocery prices, inflationary impact on living costs and higher gas prices are key factors contributing to financial stress.

• 44% say money is what tends to cause them the most stress in their lives, more than personal health (21%), work (16%) and relationships (16%).

• The gap continues to widen as money wasalso cited as the top stressor in previous years – 40% in 2023 and 38% in 2022.

• 45% of those surveyed reported their financial stress has increased over the past year.

Impact on mental health—Of significant concern is the impact this financial stress has on people’s mental health. Sixty per cent of those surveyed reported their financial stress has adversely affected their mental health.

• The constant worry about finances has led to increased anxiety and stress levels.

• Young adults (ages 18 to 34) were most affected by financial stress, with 55% reporting higher stress levels quoting factors such as student loans, job stability and housing affordability as the main culprits.

Growing optimism—In the way of good news, despite Canadians continuing to grapple with financial worries, there is a growing sense of optimism as they prioritize financial well-being with a renewed focus on financial self-care.

• 50% of those surveyed expressed increased optimism about their financial future compared to 47% last year, despite higher stress levels. This is not a huge increase but momentum in the right direction considering the external factors people have faced over the last year is encouraging.

• Optimism among young people is higher with 55% of those under the age of 35 feeling more hopeful about their financial future.

• 91% are proactively embracing strategies to reduce financial stress and combat growing economic pressures – common strategies quoted include tracking expenses, paying down debt, saving more and creating a budget.

While not necessarily a pretty picture yet, these results indicate a rise in proactive financial behaviours and demonstrates that Canadians are eager to take charge of their finances.

What can you do? As mentioned above, we are seeing a renewed surge in people taking action to combat the financial stress that they face.

Simple tasks such as creating a budget, cutting non-essential spending and better managing their debt are showing increased traction among Canadians. While there are steps you can take on your own, the study shows a clear difference in stress levels of those that work with a professional financial planner.

Canadians who don’t work with a planner are 23% more likely to have lost sleep about financial worries versus those that do.

Overall, those who don’t work with a professional planner are 33% more likely to be stressed about money.

Looking back at the 44% number quoted above (those who cite money as their top stressor), that same figure drops to 36% for those who do work with a professional planner.

This year’s Financial Stress Survey Index highlights two key themes. First, financial stress is clearly still on the rise which is likely not surprising to many people out there. But second, and more important, we are seeing a rise in people willing to take action to improve their stress and financial well-being.

If you are one of those still sitting on the sidelines and not being proactive, consider what steps you can take today to get back on the right track and improve your financial and mental well-being.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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Managing your money towards retirement

Diversifying your assets

When managing their overall net worth and planning towards their retirement, there are many Canadians who encounter a distinctive hurdle—a significant portion of their savings is often invested directly into their employer's stock.

This situation can lead to significant overexposure to a single company's performance (and often also overexposure to a specific industry sector), posing risks in the event of adverse market movements or company-specific challenges.

Investing a large portion of one's savings in employer stock can create concentration risk, leaving investors vulnerable to fluctuations in the company's performance and broader economic trends. While loyalty to one's employer is commendable, it's essential to ensure that investment decisions are grounded in diversification principles to safeguard against potential losses.

Sometimes, the old adage of “invest in what you know” can have serious negative consequences as well. I’ve seen countless examples of someone who works in a specific industry and has much of their savings in their own company’s stock and then the parts they don’t have in their own company’s shares are invested in other companies in the same industry since this is the area they know best.

For example, picture someone who works in the oil industry and the majority of their retirement savings are in the stock of their own company. The remainder of their investments are then put into the stocks of other oil and oil service companies since this investor knows that area and feels “safe” putting money there. If the oil markets take a prolonged downturn, they could be in big trouble.

Further complicating the situation is that many Canadians are already overexposed to the housing markets with much of their net worth tied up in their primary home. Now imagine someone who’s worked is tied to the housing market and their investments are in that company’s stock.

To protect yourself from these concentration risks, here are some effective strategies investors can consider to mitigate the lack of diversification that many are facing:

1. Asset allocation: A fundamental approach to diversification involves spreading investments across various asset classes, such as stocks, bonds, and alternative investments. By diversifying beyond employer stock and into other sectors, investors can reduce their exposure to company-specific risks and enhance portfolio resilience. Familiarize yourself with investment correlation (how different assets move in relation to each other) and look for options that will react differently to various market events.

2. Gradual reduction of employer stock exposure: While holding employer stock may offer certain benefits, investors should aim to gradually reduce their allocation over time. Implementing a systematic approach to rebalancing allows investors to trim their exposure to employer stock while maintaining a diversified portfolio.

3. Employ dollar-cost averaging: Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy can help mitigate the impact of market volatility and reduce the risk associated with timing the market, particularly when diversifying out of employer stock mentioned above.

4. Utilize Tax-Advantaged accounts: Take advantage of tax-advantaged accounts like Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs) to diversify investments and optimize tax efficiency. These accounts offer a range of investment options, enabling investors to construct well-diversified portfolios while minimizing tax liabilities.

5. Avoid certain sectors: If you work in say the banking industry and have company stock and/or stock options as part of your compensation, you near to carefully consider any further investments in the same sector. Similarly, if you have a significant portion of your wealth tied up in your primary home, carefully consider further allocation to real estate based investments or ones that are tied to housing prices.

Managing concentration risk stemming from heavy investments in employer stock requires a proactive approach to diversification. By being aware of the risks and implementing appropriate strategies, Canadians can build resilient portfolios that withstand market uncertainties.

By embracing diversification principles, investors can navigate the challenges posed by concentrated holdings and pursue their long-term financial goals with confidence.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



Importance of making - and sticking to - a budget

Budgeting for beginners

Living in Kelowna, nestled in the heart of British Columbia's picturesque Okanagan Valley, offers a blend of stunning natural beauty, endless outdoor recreation opportunities, and a high quality of life. It’s no wonder why so many people choose to live here.

But living here seems to cost more every day and many wonder how they can afford to do so on an “average” salary. This idea got me thinking about how a budget may look for someone earning the average Canadian salary, somewhere around $60,000 depending on which source you look at, and if they could afford to live comfortably here.

For a single person earning a salary of $60,000 per year, managing finances effectively is key to enjoying all that this area has to offer while maintaining financial stability. Let's explore a typical month in the life of such an individual and what their budget should look like:

Income breakdown: On a $60,000 annual salary, the monthly take-home pay after taxes and CPP deductions would be approximately $3,900, assuming a standard tax rate. This forms the basis of our budgeting framework for the month.

Housing Costs: Rent prices in Kelowna can vary depending on the neighbourhood and type of accommodation. A modest one-bedroom apartment in a central location might cost around $1,500 to $2,000 per month. If we take the mid-range of that and add on utilities such as electricity, water, and internet, the total housing expenses could amount to around $2,000 per month, or approximately 51% of the monthly income.

Transportation expenses: Kelowna offers a relatively compact layout, making it conducive to walking, biking, or using public transportation. However, owning a vehicle for convenience and exploring the beautiful surroundings is common. Assuming you already own a vehicle and then factoring in fuel, insurance, maintenance, and occasional parking fees, transportation expenses might average around $300 per month.

Food and groceries: Maintaining a balanced diet and enjoying the local culinary delights is essential for a fulfilling lifestyle. Allocating around $400 per month for groceries and limited dining out can provide flexibility while ensuring nutritious meals. With today’s prices, this amount can go quickly and is certainly not inclusive of regular restaurant visits.

Healthcare and insurance: Healthcare costs, including medical insurance premiums, co-pays, and prescription medications, should be factored into the budget. Setting aside $150 per month for healthcare expenses ensures adequate coverage and peace of mind. Obviously, many factors such as age and health issues could increase this amount quickly.

Household expenses: Aside from rent and utilities, and not captured in the grocery budget, there are additional household expenses that should be considered. This could be anything from buying or replacing a piece of furniture to cleaning supplies. Budgeting an additional $150 per month for other household expenses is likely a minimum amount to consider.

Entertainment and recreation: Kelowna offers an array of recreational activities, cultural events, and entertainment options to enjoy during leisure time. Setting aside around $200 per month for entertainment won’t offer a large range of options but can provide for occasional outings for socializing and exploring the city's offerings.

Savings and investments: It's crucial to prioritize savings and investments to build a secure financial future. Aim to allocate at least 15% of your (net of tax) monthly income, or $585, towards savings and investments, including retirement accounts, emergency funds, and long-term goals.

Miscellaneous expenses: Finally, it's wise to budget for miscellaneous expenses and unforeseen circumstances. After adding up all of the above amounts, this only leaves $115 per month for miscellaneous costs, such as personal grooming, gifts, clothes and other expenses.

Total Budget Summary:

• Housing: $2,000

• Transportation: $300

• Food and Groceries: $400

• Healthcare and Insurance: $150

• Household Expenses: $150

• Entertainment and Recreation: $200

• Savings and Investments: $585

• Miscellaneous Expenses: $115

As you can see above, living comfortably on a $60,000 salary in Kelowna requires careful budgeting and prioritizing expenses to align with income levels. The amount that was “left” for the miscellaneous expenses category is clearly smaller than most would like it to be.

Arguably, the easiest item to adjust here would be the amount going into savings each month since putting less away would provide more funds for other areas. But doing so would leave your retirement plans at risk.

The key here is proper budgeting and sticking to the plans that you create in order to strike a balance between securing your financial future and enjoying all that living here has to offer. Adjustments to the budget may be necessary based on individual circumstances, but with discipline and prudent financial management, living in Kelowna can be both fulfilling and financially sustainable.

Yes, I know that everyone’s situation is different, some people will have significant other expenses not listed her. This doesn’t touch on the idea of owning a home instead of renting and many other variables.

The idea of this week’s column is not to give you a budget that will be just right for your unique situation but instead to get people more open to the idea of creating a budget in the first place.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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How to deal with an underperforming investment in your portfolio

Stock market investing

Investing in the stock market can be a psychological journey filled with ups and downs. One inevitable aspect of investing is encountering underperforming investments in your portfolio.

When faced with this challenge, it's essential to approach the situation with a level head and a strategic mindset. Easier said than done right? For those that find themselves in this position, here are some effective strategies for dealing with underperforming investments:

Assess the fundamentals—Before taking any action, it's crucial to evaluate the fundamentals of the underperforming stock or mutual fund. Look into factors such as the company's financial health, competitive positioning, industry trends, and management team. Determine whether the underperformance is a result of temporary market fluctuations or if there are underlying issues affecting the investment's long-term prospects.

Reassess your investment thesis—Reflect on the reasons why you initially invested in the underperforming asset. Has anything fundamentally changed since then? Is the investment thesis still valid, or has there been a shift in the company's outlook? Be honest with yourself about whether the underperformance is a temporary setback or a signal to reconsider your investment thesis.

Set realistic expectations—Understand that not all investments will perform as expected, and occasional underperformance is a natural part of investing. Set realistic expectations for your investments and acknowledge that some level of volatility and fluctuations is inevitable in the stock market. Avoid making knee-jerk reactions based on short-term performance fluctuations.

Diversify your portfolio—One effective way to mitigate the impact of underperforming investments is to maintain a well-diversified portfolio. By spreading your investments across different asset classes, industries, and geographies, you can reduce the risk of significant losses from any single underperforming investment. Diversification helps cushion the impact of underperformance and improves the overall stability of your portfolio.

Consider tax implications—Before making any decisions regarding underperforming investments, consider the tax implications of buying, selling, or holding onto them. Selling investments that have experienced losses can result in capital gains tax benefits, which may offset some of the losses incurred. Conversely, holding onto underperforming investments for an extended period may allow you to utilize tax-loss harvesting strategies to offset gains in other parts of your portfolio. (You may also want to consider timing of these gains/losses as the capital gains rates change this summer)

Rebalance your portfolio—Periodically review and rebalance your portfolio to ensure that it remains aligned with your investment goals and risk tolerance. If an investment has significantly underperformed and no longer fits within your portfolio's objectives, consider selling it and reallocating the proceeds to more promising opportunities. Rebalancing helps maintain the desired asset allocation and reduces the risk of overexposure to underperforming assets.

Seek professional advice—If you're uncertain about how to handle underperforming investments or if they represent a significant portion of your portfolio, consider seeking advice from a professional financial planner or investment advisor. An experienced (and properly qualified) professional can provide valuable insights, guidance, and perspective on your investment decisions, helping you navigate through challenging market conditions and make informed choices.

Stay informed and remain patient—Stay informed about market developments, economic trends, and company-specific news that may impact the performance of your investments. Keep a long-term perspective and resist the temptation to make impulsive decisions based on short-term fluctuations. Remember that successful investing requires patience, discipline, and the ability to withstand occasional setbacks.

Dealing with underperforming investments requires a strategic approach, patience, and a long-term perspective. By taking an objective and unbiased look at the situation you can avoid making costly short-sighted mistakes and position your portfolio for long-term success.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Brett Millard is vice-president and a member of the executive leadership team at FP Canada, the national professional body for the financial planning industry. A not-for-profit organization, FP Canada works in the public interest to foster better financial health for all Canadians by leading the advancement of professional financial planning in Canada. 

He has worked in the financial advice industry for more than 15 years and is designated as a chartered investment manager (CIM) and is a certified financial planner (CFP).

He has written a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges they face in every stage of life. Enhancing the financial literacy of Canadian consumers is a top priority for Brett and his ongoing efforts as a finance writer focus on that initiative. 

Please let Brett know if you have any topics you’d like him to cover in future columns ,or if you’d like a referral to a qualified CFP professional in your area, by emailing him at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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