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Will the FOMO Effect Stifle Use of New TFSA Limits?

When the federal budget was presented on April 21, 2015, debt and the importance of saving were key considerations in the government’s financial plan. Fulfilling a previous promise, the budget included a highly anticipated increase in the contribution limit Canadians can make to Tax Free Saving Accounts (TFSAs). In boosting the limit by 82 per cent to $10,000 a year, the government has identified the need for Canadians to save more and attempted to encourage this behaviour with this tax-saving incentive. With people living longer and many carrying debt into retirement, this, of course, seems to make sense. One has to ask, however, if people actually have the extra money available to save and take advantage of the new rules. One also has to wonder if they have a desire to even do so, given a consumer culture and the ‘FOMO (Fear of Missing Out ) effect’,  that provides a constant encouragement to spend.

Data on the extent to which Canadians are currently using TFSAs, before the new limit changes, does leave room for some debate on how the increased limit will actually impact Canadians’ ability to save. Many economists have pointed out that the TFSA has been widely accepted and used by Canadians, with 10.7 million TFSA account holders in the country. However, it is worth noting that only 18 per cent of those made the maximal $5,500 contribution in 2013. In fact, 88 per cent of the available room in all the TFSA accounts in the country is unused, and this is before the limit increase.  This may be because Canadians’ debt loads (now at an historic high) and the monthly costs of making payments on all that debt does not leave much money left over for saving plans like the TFSA or RRSP.

A recent Bank of Montreal survey certainly supports this speculation that debt obligations are taking priority over saving. It noted that 19 per cent of respondents saved no money in 2014. Another  40 per cent of respondents said they did save some money, but felt what they saved was not  enough. The overall saving rate hit a five year low in 2014, so one does have to wonder how most people will be able to use this near doubling of the contribution limit. Will they have enough money left over, after paying the monthly bills, to put even more into TFSAs? With the Credit Counselling Society reporting a 22 per cent increase in the number of people experiencing financial difficulty in the first two months of 2015 compared to the same period in 2014, this becomes an important question.

Another important question is whether or not saving is a top priority for all Canadians, or if the ‘FOMO effect’ we are seeing will stifle use of increased TFSA limits and/or saving and budgeting in general. This ‘FOMO’ phenomenon, or the Fear of Missing Out, is very real and is impacting purchasing decisions and spending across all age groups, genders and income levels.  A report commissioned by Citizen Relations has noted that 64 percent of Canadians “admit to experiencing FOMO, with people between ages 18 and 30 in particular feeling the desire to ‘live large’ inspired by their network (56 percent)”.  While these Millennials and their desire to ‘live large’ may have a particularly strong FOMO effect, Boomers and those in the mid-life years are experiencing FOMO as well, albeit with a different focus.  The desire to not miss out on the experiences friends and peers are enjoying is leading many to seize the day and check off a ‘bucket list’ wish, often without considering budget and spending implications. This FOMO effect could be argued to run counter to the savings goals of the new TFSA guidelines.

The need for Canadians to save more and reduce their debt loads is an important objective for the Canadian government, our economy and for all Canadians. The challenge, however, is that it is hard to save and reduce debt  while the cost of living and house prices outpace wage growth in the country. What might prove to be a major hurdle along the way is our desire to keep up with the neighbours and a growing Fear of Missing Out in our society.  Time will reveal if the desired TFSA limit changes get stifled by our FOMO.



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