Getting Your Debt Under Control

There have been countless headlines and other articles in the recent past stating that Canadians are spending too much and carrying too much debt.  These claims can be easily backed by a number of studies that show household debt increasing and savings contributions headed the other direction.  At the end of 2011, Canadian household debt to income ratio is 150.8 which is now higher than the USA or the UK.  In short, Canadians need some serious help managing their debt and other finances.  This should be where financial advisors come in to offer the much needed assistance.  However, all too often we see advisors focus on products and investments.  The plans they put together suggest RRSPs and TFSAs as a means of solving problems for clients.  Before you can create a solid investment plan, the underlying debt issues must be addressed first.

Here are some areas to start working on today:

Credit Cards – The average Canadian holds three credit cards and is carrying debt on at least one of them (if not all three).  When discussing different credit card options with clients, it’s amazing how often I’m asked what the card’s interest rate is.  This question should not be at the forefront of people’s minds because they simply should not be carrying any debt on their cards at all.  Only buy what you can afford to pay off at the end of the month.  If you’re unable to stick to this plan, it may be time to cancel your cards.

Big Purchases – Do you have a new wardrobe, weekend getaway, that big vacation, new recreational vehicle or even a new house on your mind?  Ask yourself this:  What would my life be like 12 months from now if I don’t buy that item?  My guess is that you wouldn’t be that different of a person but you would be happy that your debt level is lower.  Canadians have grown accustomed to a “buy now and pay later” mentality that must stop.  If you don’t have the money to pay for it now, wait until you do!

Track Your Spending – For the next 2 or 3 months, write down every single item you spend money on from your mortgage payment to your morning coffee.  At the end of this exercise, sit down and see where your money really goes.  For example: If you go out for lunch 5 days a week, how much does that really cost?  You’ll be surprised to find out you could save thousands of dollars a year by packing your lunch.

Consolidate Debt – While this sounds like a simple solution, you must do so carefully.  Many “debt solutions” you hear advertised are not all they promise to be.  It’s important to negotiate firmly with your lending institution to ensure a competitive rate for a line of credit.  Sit down with your advisor to map out a proper plan for this.

Start Saving More – 10 years ago, the average Canadian family put 13% into their savings each year.  This number has dropped to 4% in the past few years.  No matter how good your investment returns are, you won’t be able to save up a proper retirement fund if you don’t put the capital in to get it started.

Interest rates – Rates are at all time lows BUT people must remember that they won’t stay low forever.  Although the June 5th Bank of Canada decision left rates at this low level, they have continued to indicate that they will start to increase, possible as early as this fall.  You should sit down and calculate what a 1% interest rate increase would mean for your variable rate debt.

Financial planning is about much more than recommending insurance and investment products to our clients.  Some of the most valuable advice that I am able to provide to my clients has nothing to do with our “core business”.  I strongly recommend those struggling with debt loads and/or a retirement savings plan that is lagging behind to seek proper advice now, before it’s too late