TORONTO -- It is called the wealth effect. You may decide not to cash in your investment portfolio or be willing to sell your home but when you see your assets continue to increase it can give you a sense of financial comfort. Your net worth statement on paper represents growth in various areas of your financial life. Your assets climb and your debt declines in a perfect world.
Statistics Canada is out with its National Balance Sheet for the first quarter and not surprising our national net worth fell as a result of the pandemic as COVID-19 wreaked havoc the country and on our personal balance sheets, compromising our feeling of financial security.
Now to be fair in the first quarter it wasn't all bad news, depending on how you look at it. Housing prices and sales were robust. Sales volumes where higher 37.3% in January and February in 2020 compared to a year ago while March saw a year over year sales volume increase of 22.0%.
Living in isolation and reduced spending resulted in an increase in savings from 3.6% to 6.1% as household spending came to a standstill and we went into a retail freeze.
Where the negativity crept in was the TSX pullback 21.6% by the end of the 1st quarter showing a significant drop in our investment portfolio before showing signs of a pick up in April.
And the line that always grabs attention, household debt as a proportion of disposable income rose from 175.6% to 176.9%. In others words there was 1.77 in debt for every dollar of household disposable income. Annual trends indicating lower income families tend to have a higher debt to disposable income ratio.
What does all this mean to you?
These numbers are early indicators of the impact COVID-19 has had on families. Increases in real estate and investments in the past may have given us a false sense of financial security and given the employment landscape debt levels are unlikely to come down soon.
A call to action:
- Review your personal balance sheet. Be clear on what you owe and what you own and use current valuations.
- If you have investments it may be time to rebalance your portfolio to ensure it is still aligned to your tolerance for risk and time horizon.
- Spend less than you earn – it’s easier said than done. But remember, you don’t create wealth by how much you make, you create wealth by how little you spend.
The national numbers reflect our population but the numbers you care about are your financial numbers; however, it is important to watch the trends and adjust accordingly. Your financial plan isn't carved in stone. Face today's financial realities and in some cases the destruction caused by the pandemic and build your plan accordingly for the future.
