Wealth Advantage in Canada

There was a study released in June of last year, which may have missed by many. The Canadian Centre for Policy Alternatives (CCPA) used 13 years of Statistics Canada data to track changes in wealth between Canada’s wealthiest families and those families in the middle of the wealth spectrum while adjusting for age. It is a study in contrasts: the wealth gap between Canada’s affluent and middle class is not only growing, the benefits for the most affluent start early in life.  Breaking out wealth by age reveals much more extreme gaps than are visible when all ages are mixed together.

One of the findings is that the wealthiest Canadian families in their twenties have an average net worth of over $500,000—more than Canadian middle class families manage to save over a lifetime. 

Among the study’s key findings: 

• Middle class families in 2012 had under $10,000 in wealth in their twenties and those in their sixties accumulated $470,000 in wealth by the time they start looking toward retirement.
• In 2012, Canada’s most affluent families in their twenties had $540,000 in wealth and peaked in their sixties with $3.4 million in wealth—seven times more than middle class families in that age group.
• Wealth for the most affluent families doubled in real terms between 1999 and 2012. The net worth for those in their twenties went from $280,000 in 1999 to $540,000 in 2012.  Those in their sixties saw wealth rise from $1.8 million in 1999 to $3.4 million in 2012.
• Percentage growth in wealth for the middle class was smaller in every age group in 2012. Dollar change in wealth for the middle was dwarfed by what happened for the most affluent.
• “The wealth gap has grown rapidly since 1999,” says Macdonald. “Wealthy Canadian families of all ages are worth twice as much as their counterparts were in 1999, with the exception of affluent thirtysomethings—their net worth grew by 33%. But even that more modest growth made those thirtysomethings millionaires in 2012.” 

The doubling of net worth for almost all the affluent age groups was not due to inheritance, but was related to high returns on assets since 1999; higher income levels and; much stronger pay raises for the wealthy since 1999. The study attributes the increases for the wealthy in their twenties to parental aid in three key asset areas: the principle residence, secondary real estate, and family businesses.  

So in Canada, if you aspire to be wealthy, it is not easy and it seems unlikely that the tremendously well-educated middle class youth of today could overcome the half-a-million dollar head start that the wealthiest Canadian families enjoy in their twenties. This inequality, may be one reason why people are happy with the idea that we should tax the wealthy more. It is time to re-examine measures like the 50% lower tax rate on capital gains that may, in some small measure, slow this growing gap.

For the entire study go here (pdf file)

Habits of Wealthy People

Thanks to Jim Yih for the idea and some of the content

There is not get rich scheme that will work for all of us, to get to be wealthy as the top 1% we have to be earning $215,000 a year or have a net worth of 2.5 million. Many Canadians have this net worth because they own property that has accumulated in value over time, but they do not consider themselves rich. In order to accumulate wealth in Canada or any other country you have to have some good habits.

What are these 20% doing right to accumulate the majority of the wealth in Canada? Numerous books and studies have tried to answer this question so here are some habits of wealthy Canadians.

Save regularly.

80% of the wealthy are first generation and they built their wealth one step at a time. One of the key habits wealthy people possess is a systematic disciplined savings plan. The best way for anyone to develop this habit is to start an automatic monthly savings plan where money comes off your paycheck or out of your bank account before any other expenses or deductions. Studies suggest that wealthy Canadians save about 20% of their income.

Live below your means. (Spend less than you earn)

According to the book the Millionaire Next Door by Thomas Stanley and William Danko, you may be surprised at what a wealthy person looks like. According to their research, the typical wealthy person might not be the one that drives the nice new Mercedes, living in the biggest house, wearing the top designer clothes. Rather, the millionaire next door is the person living in the same bungalow they have lived in for the past 20 years, they may drive a nice car but it is an older well taken care of car with lower mileage.

Have a Budget to know where your money is being spent.

If you want to become wealthy, you should develop a habit of tracking where you are spending your money on a monthly basis. Budgeting can be a very intimidating word but the fact remains, it is an essential habit for wealth accumulation.

Go into debt only when necessary.

Wealthy Canadians make a very conscious effort to avoid, minimize and pay off debts. It is so easy in our society to access debt. One of the habits you’ll need to build wealth is to avoid spending money you don’t have.

They maximize income.

In a study by Statistics Canada, there is a correlation between wealth and income. The more money people make the more likely they are to build wealth faster. Take time to train your mind to think outside the box about ways you might be able to increase your earning power. This might mean getting more education or starting a business or getting a part time job, etc. No one said building wealth did not take some effort.

Go into debt to own your home, or other assets that increase in value over time

The majority of wealthy people own their own home. Most wealthy Canadians have equity in other appreciating assets like business, stocks and real estate. The next time you put your money into something, ask yourself if it is an appreciating asset or a depreciating asset.

Use a team of Professionals to help you acquire and keep your wealth.

Wealthy people typically have a team of professionals to help them accumulate, manage and protect their wealth. This might include accountants, lawyers and financial advisers. Studies suggest that although they use professional advisers, they ultimately make the final decisions themselves. If you want to become wealthy, you must seek help but ultimately you must retain control over key decisions which means getting educated about wealth accumulation.

The wealth and finances of employed low-income families

In 2008, over 4.1 million individuals were living in low-income families.While many people in low income relied on government transfers, 37% of these people were also part of a family in which someone was employed for at least one-half of the year

Employed low-income families have been the subject of several recent studies. One study found the average income of individuals living in employed low-income families to be less than one-third of the income of individuals in other employed families (Fleury and Fortin 2004). Although fewer individuals in employed low-income families work full year, full time, their average hours worked are on par with other workers at around 2,000 hours (Fleury and Fortin 2006). 

Low-paying jobs are often associated with employed low-income families. However, while low pay was found to be a significant risk factor, it was not the most important determinant of low-income status. Instead, the presence of one earner (compared to multiple earners) and other family characteristics were found to be more important than pay (Fleury and Fortin 2006). Fortin calculated that 3.4 million of the employed in 2002 would drop under the low-income line if they experienced a separation or divorce in the family, or if other earners in the family experienced unemployment (Fortin 2007). In addition, certain groups like immigrants were found to be more likely to be part of an employed low-income family (Fortin 2007).

In addition to income, wealth is an important indicator of well-being since some assets could presumably be converted into cash for immediate consumption needs, especially during periods of economic hardship. This study examined the wealth, financial security and retirement plans of individuals living in employed low income families compared to those in not-employed low-income families and those in employed non-low income families.

On the whole, the wealth of employed low-income families was higher than that of not-employed low income families, but was significantly lower than that of the employed non-low-income group. An examination of assets and debts adds nuances to this finding. While 69% of employed low-income families carried debt compared to 44% of the other low income group, a large proportion of their debt took the form of residential mortgages. Much of their debt thus supported the long-term advantages of home ownership: greater wealth and lower housing expenses when the mortgage is paid off. However, employed low-income families were also more likely to carry consumer debt than the other low-income group. Notably, 4 in 10 employed low-income families carry outstanding credit card debt.

Indicators of financial security again highlight some differences between employed and not-employed low-income families, as well as their position relative to families not in low income. Employed low-income families were less likely to report not keeping up with payments than other low-income families, despite higher expenses. Nevertheless, when compared to the other employed group, employed low-income families were twice as likely to be behind in their payments. Another indicator of financial security is how families would deal with an unexpected expense. Compared to others in low income, a smaller proportion of employed low-income families reported that they would not be able to cover the expense, whether the amount were $500 or $5,000. Moreover, the employed lowincome group would be more likely to use savings to cover such an expense than the other low-income group. Altogether, these results indicate that employed low-income families were likely to feel more financially secure than the other low-income families but likely to feel less secure than families who weren’t in low income.

Retirement planning also differed for the two low income groups. Employed low-income families were more likely to have a plan that included more diverse sources of income than other low-income families. Families with a weaker connection to the labour market would be less likely to include workplace pensions or group RRSPs in their plans. Moreover, retirement planning may be a moot point for some since government pensions and other transfers to seniors replace a higher level of pre-retirement income for those near the bottom of the income distribution (LaRochelle-Côté et al. 2010).

Source: Stats Canada Report: The wealth and finances of employed low-income families by May Luong