As we celebrate Team Canada’s men’s and women’s gold medals in hockey at the Vancouver 2010 Olympics, we are all feeling good. Our country is back on top of the hockey world, and things are looking up. While we may be feeling good about our hockey teams, we aren’t feeling as good financially. Why? 2009 was a record year for personal bankruptcy filings in Canada, and the causes of the spike in bankruptcies have not gone away. The economy remains weak, and we are still carrying record levels of personal debt. That’s our biggest financial problem: debt. Debt continues to grow, and, like a ticking time bomb, high debt levels get us closer to the point of no return.
Despite the recession, or perhaps because of it, Canadians continue to borrow at record levels. By the end of the third quarter of 2009 the average Canadian adult had over $40,000 in household credit, a record level. Household credit includes credit cards, bank loans, and mortgages, so $40,000 may not appear to be a large number. After all, many people have mortgages of greater than $40,000. That’s true, but many other Canadians don’t have any mortgages or debt, so to average $40,000 over all adult Canadians, many of us are obviously carrying a significant amount of debt. As the chart shows, back in the year 2000 we each had approximately $20,000 in debt, so in less than a decade the debt we are carrying has doubled.
That’s a staggering statistic. If you are the average Canadian, your debt has doubled. Has your income doubled? Are you making twice as much today as you were earning in the year 2000? Probably not. If you still have a job you may have received “cost of living” increases of 2% per year for the last decade, but that obviously does not add up to a doubling of your income.
With these massive levels of debt, why hasn’t everyone gone bankrupt in Canada? Part of the reason is that interest rates have remained low.
In fact, mortgage rates, and consumer loan rates are lower today than they were three years ago. Low rates are partially due to governments around the world deliberately keeping rates low to stimulate spending, but low rates are also the result of the recession, where fewer people are borrowing to buy new houses, cars, and other goods.
Of course debt alone is not a problem. If I have a million dollar mortgage, but I have a job that pays me $2 million per year, my large mortgage is not really a problem. However, even if I have a small $50,000 mortgage, if I’m not working I won’t be able to make my mortgage payments on even a small mortgage. The key here is serviceability: your ability to service the debt you have.
Our ability to service our debt is a combination of the amount of debt we have (which is high), the interest rates we are paying (which are low today on most forms of debt), and our income (which for many Canadians has decreased during the recession). As the chart shows, our household debt as a percentage of our personal disposable income continues to rise.
In fact, by the end of the end of September 2009 (the most recent numbers available), the average Canadian adult was carrying household debt of 140.8% of their personal disposable income. That’s the highest level in history. Three years ago that level was “only” 120%. Stated another way, for every dollar you earn, you have $1.41 in debt, if you are the average Canadian. Obviously during this recession our debt has increased much faster than our income, and Canadians are spending more of each dollar they earn servicing their debts.
If you have a good job, and if interest rates stay low, you will probably be able to continue to service your debts. But the numbers prove that we are standing on the edge of a cliff, and all it will take is a slight breeze to knock us over the edge.
Ask yourself this: if you were to lose your job, or have your hours cut back at work, or go through a divorce, or have a medical problem so you couldn’t work, would you be able to continue paying your mortgage, your car loan, your line of credit, and your credit cards? For most people, the answer is “no”.
So what can you do to protect yourself?
First realize that your situation is precarious. Unless you have a very secure job, be very careful taking on new debt. Now may not be the time to buy a bigger house, or a new car.
Second, take steps now to reduce your expenses. You probably don’t control your paycheque, but you can control your expenses. Think about moving to a smaller house or apartment to save money. Trading in your car for something with a lower monthly payment, and a vehicle that’s better on gas, may be a good idea. Review all of your other expenses: do you really need 500 channels on T.V.that you never watch? Do you need to buy your coffee each day at the coffee shop, or can you learn to make your own? If you reduce your expenses, you will have more money to use to pay down your debts.
Finally, take steps to reduce your debt. Sell your second car and pay off the loan. Put a freeze on new spending, and start paying down your debt. Don’t just pay the minimum monthly payment on your credit cards; actively work to pay them off completely. If you can pay off your debts while you are still working, you will be in a much better position to weather the storm if you do get laid off, or if your hours are cut.
If you have already suffered through a job loss, or reduced hours at work, and if you already have more debt than you can service, it’s time to be pro-active and look for ways to eliminate your debt. That may mean you need to consider a consumer proposal or personal bankruptcy in Canada. The numbers prove that our debt problems are getting worse, not better, so there is no better time than the present to take action to reduce our debts.
posted by Doug Hoyes @