DON’T put your money HERE

Jason Heath gives you five reasons why.

With recent events in Cyprus topping the headlines this week, it has to make you wonder if you’re not better off just putting your hardearned savings under your mattress. I can think of at least five reasons that’s a bad idea.

1

The controversial proposal to bail out Cyprus by expropriating 10% of citizens’ savings would, no doubt, decrease their net worth. Canadians are sitting with record high personal debt levels right now, so we’re effectively decreasing our own net worth by taking on more and more debt. As interest continues to accrue, it seems counterintuitive for the vast majority of Canadians to consider squirrelling away their money when there are debts to pay off and interest to reduce. If people are reluctant to increase their net worth and put money in the bank or the stock market, at the very least, they should focus on the other component of their balance sheets and pay down debt.

2

O Canada, finally the envy of our peers. What a difference 20 years make. There are other countries whose economies are in better fiscal shape than ours or who have younger populations, but we’re arguably the most established and, more import- antly, we’re tried, tested and true. We came through the global recession smelling like roses on a relative basis, so if the Cypriot crisis spreads throughout Europe, where — besides U.S. treasuries — do you think people will be sending their hard-earned savings in search of safety?

3

The proposal to take 10% of Cypriots’ savings seems to be most commonly referred to in the media as a levy, which is a legal seizure of a citizen’s property. I’d call it a tax, which is, well, a legal seizure of a citizen’s property. But in much the same way our income and our property are taxed, our government provides tax incentives to engage in certain types of behaviour. For example, RRSP contributions can yield a tax refund of up to 50% depending on one’s income and province of residence. Although it does not appear that there was a mattress tax credit announced as part of this week’s Canadian federal budget, I have to admit I haven’t read the budget in its entirety.

4

Cash has been referred to as being “king” in recent years, mainly because of the deflation that occurred in the stock markets in 2008. However, in the long run, cash provides very little protection against inflation and the increases in our cost of living. The Bank of Canada has targeted a 2% inflation rate for the past 20+ years and savings accounts and GICs are barely keeping pace, let alone stashed cash in a hillbilly safety deposit box (aka mattress). I think it helps make a good case for hard assets like gold bullion, in particular, which has actually been used as money for most of human civilization. I’d be inclined to choose gold over cash to stash in my mattress, although bullion bars are notoriously uncomfortable to sleep on.

5

I’m cautiously optimistic about stock markets right now. That said, I’m worried about bubbles forming in the income stocks that everyone has been moving into in recent years. Besides that, stocks are a good way to build and protect wealth in the long run, because we are a society reliant on goods and services and the businesses that provide these to us effectively, intelligently and reliably will always generate profits in the long run. This makes them a must-have investment for most portfolios. But between newspaper headlines and the sub-par Canadian mutual fund industry, I can understand why many Canadians are reluctant to invest, unsure who to trust and reading articles like this about the investment appeal of the dark crevice between their mattress and boxspring.

In summary, I think the kneejerk reaction to stick your money in the mattress needs to be re-evaluated by anyone who is spooked by the news in Cyprus. However, I can understand the concern that the headlines are inspiring the buildup of negativity toward money, banks and government in recent years.

However, if nothing else, the ageold money under the mattress adage conjurs up images of the doorto-door tax collectors of the Dark Ages and if we ever get back to that point, where do you think is the first place they’re going to look?

SIMON DAWSON / BLOOMBERG NEWS A man pushes his bicycle past a queue of people waiting to withdraw cash from automated teller machines in Cyprus after the government proposed taxing bank accounts. Columnist Jason Heath says Canadians shouldn’t turn away from investing and banks.