Consumer Spending: the backbone to recovery… but at what cost?
September 20th, 2010 by A Licensed Insolvency 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.