I know it can be tough to save money. It’s even more difficult to up the ante and save more year-after-year. But saving is necessary to meet both our short-and-long term financial goals. Without any savings, you’ll live paycheque-to-paycheque (or worse) every month with no retirement plan whatsoever.
Related: Retirement planning for late starters
So what will it take for you to save more this year? Some people start off small, saving two or three percent of their salary, and that’s fine – every little bit counts. But many of us short-change our retirement by not finding ways to increase that amount every year. Here are four easy ways to save more in 2022:
Take up a challenge
The 52-week money saving challenge has been pinned, posted, and shared across social networks and blogs to help inspire people to save. Ordinary Canadians, who’d typically only post about their vacation and dining experiences, take up the challenge each year and talk about money. Fantastic!
The 52-week money saving challenge is simple: Save $1 in week one, $2 in week two, $3 in week three, and so on until you have about $1,400 saved by the end of the year. Or, increase the degree of difficulty and try to put away $10 in week one, $20 in week two, $30 in week three, and so on until you’ve saved nearly $14,000.
The best variation I’ve found is the reverse challenge where savers put aside $52 in week one, $51 in week two, $50 in week three, and so on. The reverse order works well because the bulk of the saving happens at the start of the year while you’re still motivated.
Let’s be honest – who’s going to remain excited after saving a measly $10 in January? But with the reverse challenge, come December, when money is tighter, the amount you need to save goes down as your spending is likely to increase. You’ll also get compound interest working for you earlier, and the habit of saving more early on just might stick with you for the entire year.
Find your match
Many employers offer a contribution-matching savings program. But according to industry experts, Canadians are leaving as much as $3-billion on the table by not taking advantage of these programs. Employers are only paying out between 40-50 percent of available matching funds.
Related: Why putting off retirement savings can cost you
Some employers will kick in 50 cents for every dollar you contribute, while others will match you dollar-for-dollar. One could argue that skipping out on an employer-matching program is a worse financial move than carrying a credit card balance for a year. That’s because you’d give up a guaranteed return of between 50-to-100 percent in order to pay down credit card debt at 19 percent.
I get it, most of these plans are voluntary and that portion of your salary feels better in your bank account than in some group plan that you can’t touch until retirement. But if your employer offers you free money, free money that doubles your retirement contribution, you take it!
The same goes for government matching programs like the Canada Education Savings Grant, which provides grants to RESP contributors – 20 percent on every dollar of the first $2,500 you save inside an RESP each year. That’s up to $500 in free money for your child’s education.
Bank your raise
One sure-fire way to boost your savings from one year to the next is to bank your raises. Okay, salary increases may be few and far between in this economic climate. But if you are managing to get an annual increase, even if it’s just cost of living, here’s an example of how to make it work for you:
Most retirement calculators assume that you save a fixed amount every year and that number doesn’t grow with inflation.
John is 25 and earns $50,000 per year. He can afford to save $250 per month ($3,000 per year) toward his retirement.
The conventional “pay-yourself-first” approach doesn’t assume any increase in that amount over time, and so after 40 years of saving $3,000 per year John will have $480,000 saved for retirement. Not bad.
Related: A simple way to boost your retirement savings
But how much would John accumulate if he simply increased his savings rate along with his two percent annual raise? It doesn’t sound like much, but it would mean an additional $145,000 at retirement – or $625,000.
Build on what’s already working
Most of us have already have some sort of automated savings plan in place, whether it’s a percentage of income that gets funnelled into our RRSP or TFSA, or monthly contributions to our child’s RESP. Even your mortgage payment is a forced automated savings plan.
Build on the good things that you already have in place. Increase your monthly mortgage payments by $50 or $100. You’ll easily take a few years off the life of your mortgage – especially if you make a habit of increasing your payments annually.
Related: How to pay off your mortgage faster
Keep bumping up the contributions to your RRSP, TFSA, and RESP until you start maxing out the annual limits. Once you get there – see if you can catch up on unused contribution room to further bolster your savings.
Final thoughts
There’s always room to improve our finances each year, but often we get complacent with our savings plans and fall victim to financial inertia.
Find a way to grow your savings every year, whether through a fun challenge, by taking advantage of employer and government matching programs, banking your raise, or by simply building on what’s already working for you.
What will it take for you to save more this year?
Happy New Year! 2021 was another crazy year for investors. Unlike 2020, which saw global stock markets shrug off a 30% decline before posting positive returns for the year, 2021 began with a meme stock craze and ended with a flurry of new all-time highs in both Canadian and US stock markets.
In this post I’ll share the 2021 investment returns for global stock and bond markets. Since you can’t directly invest in an index, I’ll use the performance of various Canadian-listed Vanguard ETFs as a proxy for each index.
2021 Investment Returns
Who predicted that Canadian stocks would lead the way in 2021? That’s exactly what happened with Vanguard’s FTSE Canada Index ETF (VCE) posting a 28.50% return. VCE closely matches the S&P/TSX 60 (the largest stocks in Canada), but Vanguard also offers a broader “all cap” Canadian index fund (VCN), which tracks about 180 stocks, and it returned 25.61% in 2021.
U.S. stocks continued their astonishing run in 2021. Vanguard’s S&P 500 Index ETF (VSP) returned 27.90% in 2021, while the broader US Total Market Index ETF (VUN), which tracks about 4,000 stocks, returned 24.41% in 2021.
These results speak to the continued dominance of large cap growth stocks, particularly south of the border.
On the international side, Vanguard’s FTSE Developed All Cap ex North America Index ETF (VIU) returned 9.57% last year, while Vanguard’s FTSE Emerging Markets All Cap Index ETF (VEE) was flat with just a 0.08% increase in 2021.
It was a poor year for bond returns, but maybe not as bad as some initially feared.
Vanguard’s Canadian Aggregate Bond Index ETF (VAB) posted a -2.85% return for the year, after increasing by 8.60% in 2020. Vanguard’s Canadian Short-Term Bond Index ETF (VSB) didn’t fare much better, posting a -1.05% return last year after a 5.14% gain in 2020.
The Vanguard U.S. Aggregate Bond Index ETF (VBU) was down -2.07% in 2021 after posting a positive 7.24% return in 2020. And, the Vanguard Global ex-U.S. Aggregate Bond Index ETF (VBG) was down -3.04% in 2021 after posting a positive 3.85% return in 2020.
Vanguard Asset Allocation ETF Returns 2021
Some investors, like me, prefer to bundle all of these investments into one globally diversified and automatically rebalancing ETF – called an asset allocation ETF. Here are the results for Vanguard’s asset allocation ETFs:
| ETF | Stock/Bond | 2021 | 2020 |
| VEQT | 100/0 | 19.59% | 11.29% |
| VGRO | 80/20 | 14.90% | 10.89% |
| VBAL | 60/40 | 10.27% | 10.24% |
| VRIF | 50/50 | 7.56% | n/a |
| VCNS | 40/60 | 5.77% | 9.41% |
| VCIP | 20/80 | 1.46% | 8.43% |
Remember, these asset allocation ETFs are actually bundles of 4-7 individual ETFs. VEQT is comprised of the following four ETFs:
- VUN – 43.7% weight
- VCN – 29.8% weight
- VIU – 19.2% weight
- VEE – 7.3% weight
The other asset allocation ETFs include the four ETFs above, plus three individual bond ETFs (VAB, VBU, and VBG).
I believe there’s a behavioural advantage to holding the bundled-up version of these ETFs. Why? Because if we see the individual parts (and their daily returns) we might be tempted to tinker with our portfolio. Indeed, why hold emerging markets (VEE) when the returns have been so poor compared to North American stocks?
Related: Top ETFs and Model Portfolios for Canadian Investors
But there’s a saying that your portfolio is like a bar of soap – the more you touch it, the smaller it gets.
Canadian stocks have had a dismal run compared to U.S. stocks over the last decade. I don’t know of any investor who wanted to hold more Canadian stocks. In fact, one of the biggest complaints I get about VEQT is its ~30% weighting to Canadian equities.
But, as 2021 showed us, we simply don’t know which markets will outperform in the future. Last year’s losers routinely become next year’s winners (and vice versa). That’s why it’s sensible to hold a globally diversified portfolio, to capture all global stock returns rather than concentrating in any one country or region.
At this time last year, many investors wanted to ditch Canadian stocks and go all-in on the S&P 500. Some wanted to shift out of the S&P 500 and go all-in on the NASDAQ 100. A select few wanted to dump the NASDAQ in favour of Cathie Wood’s ARKK. That one didn’t work out so well…
This is classic performance chasing. The problem is, past performance is not indicative of future returns.
Sometimes I think ETF investors need to take a page out of the value investor playbook. Instead of loading up on what has done extraordinarily well last year, value investors counterintuitively look for stocks that have performed poorly in the past. That’s because they’re after future returns, not past performance. And stocks trading at attractive valuations tend to have higher expected future returns.
With that in mind, which investment do you think should have higher expected future returns? The all-time high S&P 500 ETF, or the (relatively) poor performing emerging markets ETF?
Now, I’m not suggesting that investors put all of their money into emerging markets. But they certainly shouldn’t deliberately avoid emerging markets because of the recent underperformance.
My 2021 Investment Returns
I invest 100% of my money in Vanguard’s All Equity ETF (VEQT). It stands to reason that I should have achieved a 19.59% return across all of my accounts. But investment returns don’t work that way. We need to account for any contributions and/or withdrawals, as well as the timing of those cash flows throughout the year.
Here are my 2021 investment returns:
- RRSP – 19.68%
- TFSA – 19.32%
- LIRA – 19.59% (this aligns exactly with VEQT’s return because there were no contributions or withdrawals)
- Corporate – 20.88%
- RESP – 21.25% (my kids’ RESP is invested in TD e-Series funds)
It’s interesting that for all of the fussing index investors do over which portfolio to choose (Vanguard, iShares, BMO, TD, Horizons, etc), the TD e-Series funds have held up remarkably well compared to a similar all-equity ETF portfolio.
That’s why, for me, it doesn’t really matter which product you choose. Select an appropriate asset mix that you can stick to for the long-term and then find a product that matches what you’re looking for. Don’t lose sleep over 5 basis points of cost (0.05% MER), or an extra 5% allocation to Canadian stocks.
Final Thoughts
2021 was another fantastic year for investment returns. Canadian stocks led the way with a 28.50% return, while U.S. stocks closely trailed at 27.90%. A globally diversified all-stock portfolio returned 19.59% (dragged down by international and emerging market stocks). These are eye-popping numbers.
The long-term annual average stock returns are closer to 8-10%, depending on which country’s stock market you follow. But because the past decade’s stock returns have been so high, it makes sense to lower our expectations for future annual returns to the 6% range.
This is not to rain on anyone’s investing parade. But I fear that many investors have come to believe double-digit investment returns are a given, and that moving money into hot performing sectors or countries is a guaranteed recipe for success.
That warning doesn’t mean markets are going to crash anytime soon. Stocks can continue to climb, crash, or go sideways for many years. No one knows.
The point is, if you’re a balanced or conservative investor who’s feeling a bit of FOMO and wanting to increase your equity allocation to chase returns, think again. Remember why you set up your portfolio in the first place. It was to maximize returns, given the amount of risk you are willing to take.
How did your investments perform in 2021? Did you make any changes to your portfolio? Let me know in the comments.
Last year we reached the million-dollar net worth milestone. The goal itself wasn’t life changing, by any means, but it was something we had been striving to hit for nearly a decade – and it felt pretty damn good!
The truth is we have changed our lives for the better over the last two years. I quit my day job at the end of 2019 to focus on blogging, freelance writing, and my fee-only financial planning practice.
My wife and I run a successful business that has wildly exceeded our expectations. Once we reached the $1M net worth mark we made two new goals. One, to try and reach $2M by the end of 2025. And, two, to adopt a Coast FIRE mentality where we no longer save aggressively for retirement. Instead, we’ll intentionally work less and spend more to increase our overall life satisfaction. (And, yes, we can achieve both!).
We’ll still max out our TFSAs each year, along with the kids’ RESPs. But no more RRSP contributions. On the corporate side of our ledger, we’ll try to limit our earnings so that we can pay ourselves just enough to meet our lifestyle needs. No more contributions towards our corporate investments.
The Coast FIRE approach means we can let our investments grow without actively contributing to them anymore. We’re not ‘retired’. We enjoy what we do. We just don’t need to work as hard or save as aggressively as we have been over the past 10 years. That means more time spent with our family, more time for active leisure, and more time for (and money spent on) travel.
We have been in a fortunate position throughout the pandemic. We work from home. We have a lot of interest in our fee-only financial planning service. I have two steady and reliable freelance writing clients. And, thanks to the loyal readers of this blog, we do receive a decent amount of revenue each month.
The lack of travel and ability to do much of anything over the past 2 years meant accepting more clients and freelance assignments than I probably wanted to. It’s hard to say no when you have nothing better to do.
We’re hoping once we get to the other side of this Omicron wave that we can resume our plans to travel. That will force us to work less, and earn less revenue. The downside is we won’t be able to save as much, which will take some getting used to after 10+ years of trying to maximize our savings rate.
To give you some perspective, this year we contributed $70,000 to our corporate investments. That’s money earned over and above what we needed to pay ourselves and our business expenses. On the personal side of the ledger, we saved $55,000 and put that towards my TFSA, my wife’s TFSA, and our kids’ RESPs.
The stock market was on fire once again in 2021. The S&P 500 was up 29%, the TSX was up 21%, and my global equity holding (Vanguard’s VEQT) was up 22% for the year.
Our savings contributions and stock market performance contributed to another fantastic year in terms of net worth growth. Here’s how our net worth looks at the end of 2021:
Net worth update: 2021 year-end review
| 2021 | 2020 | 2019 | % Change | |||
|---|---|---|---|---|---|---|
| Assets | ||||||
| Chequing account | $5,000 | $5,000 | $1,500 | — | ||
| Savings account | $65,000 | $65,000 | $35,000 | — | ||
| Defined benefit pension | — | — | $224,054 | — | ||
| Corporate investment account | $207,003 | $109,281 | — | 89.42% | ||
| RRSP | $294,664 | $246,391 | $208,614 | 19.59% | ||
| LIRA | $198,365 | $162,218 | — | 22.28% | ||
| TFSA | $160,942 | $88,882 | $49,239 | 81.07% | ||
| RESP | $84,148 | $64,428 | $52,754 | 30.61% | ||
| Principal Residence | $459,000 | $459,000 | $459,000 | — | ||
| Total assets | $1,474,122 | $1,200,200 | $1,030,161 | 22.82% | ||
| — | ||||||
| Debt | ||||||
| Mortgage | $172,161 | $187,059 | $201,665 | -7.96% | ||
| Total debt | $172,161 | $187,059 | $201,665 | -7.96% | ||
| — | ||||||
| Net worth | $1,301,961 | $1,013,141 | $828,496 | 28.51% |
Now let’s answer a few questions about the way I calculate our net worth:
Credit Cards, Banking, and Investments
We funnel all of our purchases onto a few different rewards credit cards to earn points on our everyday spending.
Our go-to card is the Scotia Momentum Visa Infinite Card, which we use for non-Costco groceries and gas. I’m also using the HSBC World Elite MasterCard, which came with an incredible 100,000 point welcome bonus. Finally, we look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers.
Our joint chequing account is held at TD, along with our mortgage and kids’ RESPs. My wife has her own chequing and savings accounts at Tangerine. Our high interest savings account is held at EQ Bank, which pays 1.25% interest.
My RRSP and TFSA are held at the zero-commission trading platform Wealthsimple Trade. My LIRA is held at TD Direct, and the corporate investment account is held at Questrade. My wife’s investments are held at Wealthsimple. You know all of this from my post about how I invest my own money.
RRSP / LIRA / RESP
The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.
My preferred method is to list the current value of my RRSP, LIRA, and RESP plans rather than discounting their future value to account for taxes and distributions.
I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP/LIRA and distribute the RESP to my kids, my net worth will decrease accordingly.
Principal Residence
We bought our home in 2011 for $424,000 and developed our basement a few years later, increasing its value to ~$450,000. The next year I bumped up the market value by 2% (which is still less than its city-assessed value), but the local real estate market has since flattened – with nothing selling in our price range – and so I’ve left the value at $459,000 for the past three years.
Final thoughts and a look to 2022
Again, I want to acknowledge the immense privilege of being able to work from home and prosper in the middle of a pandemic when so many people have lost so much. My wife and I are incredibly grateful for everything we have.
While I was excited to see our net worth grow by nearly $300,000 this year, I recognize that we cannot expect investments to continue to climb at 20%+ each year. We do need to temper expectations for future returns, which is why I only use a 6% nominal rate of return for future investment return projections.
That said, thanks to this year’s impressive performance we would only need our net worth to grow by about 12% per year for the next four years to reach our $2M milestone. That should be achievable, even as we dial back work and savings with our Coast FIRE approach.
I’ve already shared our financial goals for 2022. Aside from that, we just hope we can put the worst of the pandemic behind us next year and move on with our lives.
How did your finances fare in 2021? Let me know in the comments below.