“Younger Canadians More At Risk from Debt” was the headline of a news release I received from the Canadian Association of Insolvency and Restructuring Professionals (CAIRP). This article emphasized that those most at risk of filing bankruptcy in Canada during this recession are Canadians age 35 and younger. There are many factors that CAIRP identifies that contribute to this, including:
- Unprecedented Low interest rates
- Easy availability of credit
- Favourable job market
- Never lived through a “real” recession
- Lived during a time of unprecedented wealth
- Cost of student loans
- Lack of seniority
Regardless of the risk, age, or demographic profile, if you feel you are at risk, the best thing you can do is to immediately step back and take stock of your situation. Here are some helpful steps to help you gain control of your finances and give you the greatest chance of surviving this current recession and any other economic storm.
1 Reduce your cost of living.
Regardless of what type of income you make, there is no better advice than to learn to live on less. We will all be much better off in the long run — this effort will be even more crucial in the years ahead than it has been in the past. Now this doesn’t mean you need to cut everything out. But if we can learn to reduce our expectations and learn to be a little thriftier, we will have a much greater ability to handle whatever situation we confront. Remember, we have just lived through one of the most prosperous times in history and it would be a mistake to assume that things will always remain as good as they have been. There is nothing suggesting we will return to this level of prosperity. This type of faulty thinking has been one of the biggest reasons our economy has slid into its current downturn.
2 Start a habit of saving and make it a lifelong pursuit.
There is no security like money in the bank. This is the best insurance you can have against disruptions in employment or income. If this is done in combination with a concerted effort to reduce the cost of living, you will be able to handle the current crisis as simply a temporary hiccup.
3 Pay down your debt.
Debt has become far too common. Our society is now so dependent on debt that even a small adjustment in the interest rates can have catastrophic effects on tens of thousands of people. We all need to reduce our dependence on debt. Gradually pay down your debt, when it is paid off, avoid getting back to the same position you are in today. This includes your mortgage.
4 Invest in yourself.
We need to adopt the practice of lifelong learning. The better you are at what you do, the more valuable you are in general. This will give us greater job security, more marketability, and protection against job loss. And if we do lose our jobs, it will help us to get back on our feet quickly, and open doors for future opportunities. This learning and skill development does not even need to be related to our normal employment; the more diverse our skill set, the more prepared we will be for unforeseen events that could occur in the future.
5 Build up an emergency fund.
This is a lost art. We all need a cash reserve to help if an emergency should occur. An available line of credit may appear to be helpful, but it is not as good as cash in the bank. This is true at any time, but especially true when dealing with an economic slowdown or recession. Of course most people are not in the position where they can run down to the bank and simply set aside sufficient monies to cover the suggested three to six months’ of living costs. The only way to get there is to start. Start a reserve, every little bit helps and you never know when this reserve is going to be just what you need to overcome one of those temporary hiccups we all experience.
6 Learn to live off a budget
A budget is an essential tool. It is not meant to restrict you, but to keep you on track. If you don’t already have a budget, begin by keeping receipts for everything you spend, at the end of the month summarize those receipts and group them in to major categories (i.e. food, housing, utilities, recreation etc.). Then sit down and review this at the end of the month to determine what was essential and what wasn’t, where you benefited from the capital spent, and where you spent money but really had nothing to show for it. Then use this information to establish a plan. Plan how you and your family are going to spend your money, put limits in place to ensure that you don’t overspend, and lean to live by this plan. Most importantly, learn to distinguish between wants and needs. Society tends to encourage us to blur the line between these, but we need to make sure we clearly understand the difference. We should be modest in our wants; it is not what we have that brings us happiness in life.
If we all learn to follow these six steps, regardless of our age, we will be in a much stronger financial position. While many of these steps seem like they should be second nature, they are not. If we don’t make a point of focusing on each of these steps on a regular basis, they are very easily neglected. Make your finances a focus; prepare yourselves for the future. The sooner you begin, the easier it will be.
Written by Barton Goth, Trustee in Bankruptcy.