Consumer Prices In Canada Are Up. 

What About Your Household's Cost Of Living?

Statistics Canada announced today that over the year ending May 31, it cost 2.4% more to purchase the basket of consumer goods that it monitors.

Basically, this is how that basket is structured:

Shelter = 27%

Transportation = 20%

Food = 17%

Household operations, furnishings and equipment = 13%

Recreation, education, reading = 10%

Clothing and footwear = 5%

Health and personal care = 5%

Alcohol, tobacco, (recreational) cannabis = 3%

Of course, your own cost of living weights will likely differ. As an experiment, you may want to try to determine by how much.

Why should we care?

When we create a Wealth Forecast, one of the most important assumptions we make is the annual increase in your cost of living. The rate of growth of your net worth needs to at least keep up with the rate of increase in your cost of living, otherwise you will start to see an erosion in your total net worth and ultimately the value of your estate. 

When we are in the business of building wealth, this is obviously crucial. When it comes to maintaining your comfortable lifestyle in later life (and avoiding the risk of running out of money), it is paramount.

For those who have not had the time to figure out exactly what your cost of living is, we can fall back on Statistics Canada's data, but it will be a little less accurate. What you consume and where you consume it is going to be different for every household.

The long-term historical average is about 2.1%.

You will need to get at least that annualized return (possibly more depending on your own circumstances) to be able to stay even over time.

The current risk free rate of return (a 3 month Government of Canada treasury bill) is about 1.6% (before fees and taxes). Depending on your marginal tax rate, that will slip closer to 1%.

So, inevitably, if you do not want to see the value of your net worth decline, you are likely going to have to take some risk with your investments. 

How much risk is going to be contingent on what your goals are and what your cost of living will be into the future, that is why it is such an important assumption, especially when you are looking out 30 - 40 or more years.

The more planning that you do, in advance (like trying to determine your annual cost of living increase as accurately as possible), the more likely you are going to understand what risk you have to take and what you need to do to be able to meet your goals.

Any business would not be successful without a business plan. Why would a household be successful without a financial plan?

Once we have a handle on what amount of risk we need to take, we can build a strategy around getting the maximum growth possible, while at the same time, taking as little risk as possible. Why take more risk than absolutely necessary? Taking more risk than necessary could jeopardize  your long-term growth needs.

At High Rock, we manage risk first, so as to not put a well-crafted plan (Wealth Forecast) into jeopardy.

Manage your risk, manage your costs (of investing) manage your plan and you will have a successful future.