Canadians have hit another all new high for household debt according to the office of the parliamentary budget officer. This is setting up Canadians for a potential financial crisis when the interest rates inevitably go up. As Canadians have taken advantage of low interest rates for years, the hole we’ve created for ourselves is only becoming deeper and deeper as Canadians continue to spend. Canadians are spending more because we are responding to the interest rates reaching record lows. As the rates drop, consumers will increase their spending. This is a recipe for disaster because these record low interest rates will soon change and what may make sense today will become a financial disaster for many in the near future. Household “net worth” is also at record highs but this is mainly due to the current values in “real estate” not cash savings. Should these property values be potentially inflated due to the unprecedented level of demand, then when the demand slows, the true property values would shine through revealing a different “net worth” position for many homeowners.
Homeowners are becoming increasingly confident because they believe their property values are continuously increasing; CBC calls this the wealth effect. This is paper wealth that is drawing us into a clouded perspective with a distorted physiological effect. This will draw us into behaviours where we will continue to spend like drunken sailors but all this spending will be money gone and cannot be realized when the property is sold. If we do realize a drop in the housing market values, coupled with the current historical debt loads that we are currently carrying, the Canadian economy would be in for some very tough and trying times ahead.
Here Are Some Alarming Statistics And Facts In Recent Studies;
Statistics Canada recently updated that for every $100 Canadians make they owe over $168, this slightly down from $171 in 2015, but studied stats indicate it can likely soon reach $174 all of which are breaking records!
According to the Parliamentary Budget Officer, the current Bank of Canada’s Key rate of 0.5% can climb to 3.5% by the year 2020. That’s only 3 short years! This would mean the amount paid down against the principle debt will decrease resulting in more interest being collected. Not a good position for the debt holder.
“The financial vulnerability of the average household would rise to levels beyond historical experience” said CBC in a recent report regarding future interest rate increases.
Due to historically low interest rates, Statistics Canada revealed that household debt across our nation has achieved unprecedented heights amid intensified borrowing.
(CPA) The Canadian Payroll Association recently shared that approximately 24 per cent of Canada’s workforce do not have access to at least $2,000 in the event of an emergency.
The Financial Post also reported from a recent survey taken, that almost half of Canadian employees (approx. 50%) would not be able to pay their bills including other living costs if their pay would be delayed by even just one week for whatever reason!
The Credit Counselling Society has advised consumers to be wary of their borrowing habits.
Bill Morneau, Canada’s Finance Minister has stressed concern on greater economic risk due to record debt burdens
This troubling information, in my opinion, is simply the tip of the “Canadian household debt” iceberg! We can read articles, watch television programs, surf the internet or we can simply act now. Please read on for a game plan out!
Some Very Important Tips To Keep Our Heads Above Water;
Do not spend more money than you make.
Actively pay down your debt, not just the minimum payments.
You must save something on a regular basis.
Look for bargains and sales always.
Plan right and stick to it before you head out to shop.
Realize where you are spending your money so you can adjust accordingly.
Remove your credit cards from your wallet and only use them with a planned purchase.
Use debit cautiously instead of credit but monitor your balance closely.
These tips are not for everyone as some people are able to balance their monthly expenses by using their credit cards for convenience but for the other 98% of consumers keeping your hands in your pockets is a gigantic challenge.
What Can We Do To Improve Our Financial Vulnerability?
We must recognize, accept and react to the sounding alarms. We need to curve our spending habits by revisiting our priorities especially when it comes to pulling out our credit cards for impulse purchases. An even better action is to make certain lifestyle changes where you would cut some unnecessary expenses out completely just by awareness alone. It really isn’t rocket science. The ultimate reward would be to start your regular deposits in to your savings also called forced savings. Set up an auto transfer into a savings account. It works!
Is There A Silver Lining?
Yes there is. You can use this current “low interest” period to your ultimate advantage and here’s how. The Bank of Canada can’t raise rates too quickly because there is simply too much outstanding debt. This means the rates should hover in this general area for the coming year or two making it a perfect environment to implement your plan to eliminate as much debt as possible. With a short term plan for the next 2-3 year period, you can actually pound away at some debt by utilizing some of my tips above. Start your journey to a “debt free life” today!