Consumer Spending: the backbone to recovery… but at what cost?

September 20th, 2010 by Barton Goth, Trustee

There is no secret, the recession is technically over, and we can thank our friends, family and neighbors. As was correctly predicted by Bill Bonner in 2003, “the entire world economy rests on the consumer; if he ever stops spending money he doesn’t have on things he doesn’t need — we’re done for.” Who knew how true this pronouncement was, at least here in Canada?

One of the most concerning studies that has garnered significant media coverage lately was done by the Canadian Payroll Association (CPA). On September 13, 2010 the (CPA) released the results of a survey of working Canadians they had recently conducted and some of the more interesting findings were as follows:

• 59% of respondents say they would be in financial difficulty if their pay cheque was delayed by a week.

• 62% of respondents expect a salary increase, but 83% of respondents also expect their cost of living will increase in the next twelve months.

• 47% of respondents are saving only 5% or less of their net pay.

• 81% say their first priority if they were to win $1 million from a lottery, would be to pay off their debt

• 59% of respondents feel the economy in their city or town will improve in the next year, but this was down from 67% in 2009.

• 69% of respondents say it would be difficult to find comparable employment with a similar salary if they lost their job.

So if these findings are representative, that means 6 out of 10 people would experience financial difficulty if their pay was delayed for 7 days, suggesting these people do not have an adequate emergency fund. Approximately half of Canadians are saving far less than is generally recommended by financial planners. Fewer Canadians are optimistic when it comes to their economic future, a finding that is surprising to most financial professionals, and debt continues to be a major concern for the majority of Canadians.

Another interesting component of this survey is the order in which respondents ranked the economic issues that were of greatest concern:

1st – Higher interest rates

2nd –  Not being able to save enough to retire comfortably

3rd –  Inflation

4th – Falling back into a recession

5th – Loss of job

6th Decline in value of house

As well, there were other notable findings. John Morrissy in the Financial Post referenced a warning made by Organization for Economic Co-operation and Development (OECD) that “record debt levels have left many Canadians vulnerable to future adverse shocks.” The major cause of these debt levels is an increase in household credit and mortgage debt that was associated with the flurry of real estate activity that largely helped to fuel our Canada’s economic recovery.

A similar article in the Monday’s Globe and Mail by Tavia Grant referenced a news release by Statistics Canada which reported that household net worth fell by a total of $34 billion, which is the first decline since early 2009, noteworthy because this is the first time since the recession that household net worth decreased.

So what does all this mean?

The recession is over. Canada has begun to raise interest rates. A recovery looks plausible, but it is the consumer who has suffered. If the government continues to raise interest rates, it is likely that the very people we have to thank for the economic recovery may end up dragging the country back into a recession. As a result, the Canadian government can no longer rely on the consumer, and the consumer needs to take responsibility for their finances, control their spending and set a little aside for a rainy day.

As consumers, we need to proceed with caution. If you haven’t already begun to look at your finances there are a number of steps you need to take:

Step 1: Take stocka
Evaluate where you and your family sit. Look at your monthly income, review how much you spend each month, and on what you spend money on. If you are unsure, keep receipts for all your family’s purchases for the next 3 months. Determine if you are living on what you are making, how much you owe and who you owe it to. If you are not able to find room to cover all your necessary expenses, you may be in a position where you have to consult with a licensed trustee to discuss what options exist that will allow you to put things back in to a positive cash flow position.

Step 2: Establish a habit of saving
Everyone needs an emergency fund. Most define this as the equivalent of 3 months living expenses. If you don’t have this, and the statistics suggest that most of us do not, make saving a priority. Set up an automatic transfer at the beginning of the month to remove 10% of your net income into a separate account you have designated for emergencies. Be diligent. Be persistent.

Step 3: Pay down debt
Now is the time to pay down your debt. Don’t leave it until interest rebounds to historically normal levels. Select the loan or credit card that charges the highest interest and prepay that account as much as possible. Remember, it may not seem like a large payment, but even small payments can save a tremendous amount of interest. If the amount you owe is too significant and simply doesn’t leave you any room, consult with a professional. Review how the filing of a consumer proposals, a debt management plan or even a personal bankruptcy may allow you to reduce your exposure to risk, and allow you to meet your monthly obligations and prepare for the unexpected. xxx
Remember, personal finance is not rocket science, it is simple. If we all can learn to live on less than we earn, set aside something for a rainy day and reduce our dependence on credit, your finances will be more stable, less susceptible to economic swings and fundamentally better off.

About the Author: This article has been written by Barton K. Goth of Goth & Company Inc., a licensed Edmonton bankruptcy trustee, member of the Canadian Association of Insolvency and Restructuring Professionals, and a managing editor of the Trustee Talks blog.

Barton Goth, Trustee
Barton is a Licensed Insolvency Trustee at Goth & Company Ltd. He works with a variety of debtors and specializes in creating customized debt solutions that allow his clients to put their financial troubles behind them and look forward to a fresh start.

One Response to “Consumer Spending: the backbone to recovery… but at what cost?”



September 21, 2010 at 12:21 am, Toxicosis said:

We left the recession? Wrong. Increasing interest rates do not provide credence that we left any downturn. In fact what we entered in 2008 is the beginning of a new and final depression, we’ve just artificially avoided it by papering it over with cheap and easy money. Our 30-40 year addiction to credit is a bill that is finally coming due. This is both consumer and governmental. Did the consumer use net disposable income only to continue mass consumption over the last 5-10 years. Absolutely not. They refinanced homes, used borrowed money, maxed out credit cards and lines of credit, and spent obviously well more than they earned. An economy is only as strong as it’s productive, manufacturing, and it’s solvent consumer base allow. We sold much of this down the river especially the last 20 years, and without credit nominal GDP would be exceptionally negative. Paying the minimum does not a solvent consumer make. Savings and proper investment in a productive capacity make a society strong, not which corporations make the most money or have high stock price value on an exchange. Stupidity on all levels is being met by harsh reality. This will bite much deeper and to the bone in very short order. Basic math and financial responsibility are lost on the great majority in much of the world and North America. Good luck, you’re gonna need it.

Please post a follow up comment below:

(Note: comments are reviewed by moderators and then posted after approval. In addition, due to high volume some of the comments might not be posted.)