Opinion: In this economy, traditional personal finance advice can no longer help you

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Elena Delgado picks up food during a visit to the Daily Bread Food Bank on April 18. Delgado has been using the food bank once a week since the pandemic began.Fred Lum/the Globe and Mail

Saijal Patel is the founder and chief executive officer of Saij Wealth Consulting, a consultancy and education platform dedicated to empowering women’s financial independence and security.

As a financial educator and a business TV host, I’m witnessing first hand the profound impact that recent economic changes have had on the psyche. There’s a notable shift in conversations – from what used to be on investment strategies and retirement planning, to now finding ways to maximize limited resources and prevent overwhelming debt. There’s a prevailing sense of hopelessness in achieving financial goals.

According to the Bank of Nova Scotia’s recent Worry Poll, 73 per cent of those surveyed had high levels of concern over the rising cost of living. Those who worried spent the most time stressed about paying for day-to-day expenses (44 per cent), paying off debt (39 per cent) and saving for emergencies (38 per cent).

Amid the current cost-of-living crisis, traditional personal financial advice is becoming outdated. And as its impact on the financial well-being of Canadians wanes, the role of another factor has grown and is threatening to eclipse all others: politics and government policy. Now, more than ever before, the primary influence on Canadians’ financial well-being is a force largely outside of their control.

Advisers and influencers can no doubt play a crucial role in empowering individuals to take the first step toward financial stability. They can help them prioritize what they can control, such as gaining awareness of their spending habits and acquiring savings extraction skills.

But so many experts, when asked for advice on what people who are financially stressed can do, often advocate budgeting or to follow a certain golden rule (that someone makes popular), even when it is nonsensical or impractical. There’s a floor to how much, and where one can cut costs. Everyone needs an adequate living space, decent food on the table and basic necessities, all of which have skyrocketed in expenses.

Take for example, the 50-30-20 rule in budgeting that many personal financial experts tout. It recommends that 50 per cent of your net income go toward living expenses and essentials (needs), 30 per cent towards discretionary spending (wants), and 20 per cent towards savings (emergency funds and future goals).

According to Statistics Canada, the median after-tax income for households was $73,000 in 2020. Based on this, no more than $36,500 or $3,041 per month should be allocated to one’s essentials. Yet the average monthly rent in Canada stands at approximately $2,000 (rising to $3,000 in the Greater Toronto Area), and the average monthly grocery bill is $1,065 for a family of four.

Without even factoring in utilities, clothing, medicine and transportation expenses, it becomes unmistakably clear that adhering to these benchmarks would be unattainable for the majority of Canadians. In fact, the most recent National Bank’s Housing Affordability Report revealed that the average Canadian would need an annual income of $184,524 to purchase a “representative home” (more than two times the median).

Hence, a rule of thumb by Canada Mortgage and Housing Corporation, which suggests housing costs shouldn’t be more than 32 per cent of one’s gross income, is out of touch with reality. Given the stark choice between homelessness and incurring debt or cashing out their retirement savings, any reasonable person would opt for the latter.

The two biggest expenses Canadians face today are housing and taxes – both being under the control of the government. According to the independent public policy think-tank Fraser Institute, the average Canadian family spent 43 per cent of its income on taxes in 2021 – more than housing, food and clothing costs combined.

To truly champion people’s financial well-being, we must acknowledge that many of our most significant financial hurdles do not lie solely within individuals’ control, but rather in the hands of our elected leaders and the policies they shape or neglect.

Financial education is the key if we are to ensure individuals and, collectively, our society is prosperous. For one, it equips individuals with the skills to effectively manage their finances where they can. Secondly, it enables them to discern when politicians merely offer empty rhetoric or false promises – and to instead demand transparency, accountability and evidence-based policies that directly influence their economic needs and financial well-being.

Personal finance is inherently intertwined with politics. Denying this reality or claiming that political discussions are inappropriate means disregarding the profound impact of government policies on the economy, or the financial health and security of individuals.

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