Tag Archives: consumer debt

The “Average” Person’s Debts

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Maclean’s magazine had a small section on our average debts that was quite interesting. And, according to Statistics Canada, the average person in debt isn’t an unemployed renter in their 20s.

Some of the information is quite eye-opening:

In total debts, BC and Alberta run neck and neck for a record we really don’t want to have: BC averages $155,000 in debt per family while it’s $157,000 in Alberta. Only Ontario is close at $125,000.

Don’t think high income earners are always savers. We’ve talked before that the more income you earn, the less likely it is that you’ll live on a budget or are careful about your spending: 57% of the total consumer debt in the country is owed by people who make more than $100,000. But they’re a tiny group in the population! Ah, but they’ve got the income to pay the big mortgage, car, and credit card payments. No, not to pay them off, just the payments each month assuming there isn’t a hiccup in their earnings.

What’s strange is that people who have the most debt claim that they are the most financially literate. Is that backwards or what?
45% say they’re very financially literate owing over $250,000
35% respond the same way owing $150, 000 to $250,000

One sad fact is something we talked about before. It’s the 65 and older age group who still average $66,000 of debt.

The age group of 45 to 64 has $103,000 of debt. So, in the highest earning years of our 40s and 50s we manage to pay off only $37,000 of debt? Any family in the 40 to 50 age group likely has their kids moved out and still can’t save OR pay off debts? That’s cause for concern and sad.

In a US survey done by the Consumer Federation of America, along with Primerica, the average respondent admitted they had made at least one financial mistake averaging $23,000. THAT is one expensive lesson, and for many people not something they’ll recover from for decades.

Broke and Broker

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Wow! We’re number one!! Add something else to the list of what we are beating the Americans at. Except this one isn’t worth the win.

What’s the so-called win? We just hit a debt-to-income ratio record of 150%. That means for every $100 we earn, we have $150 of debt. NOT something to be proud of.

Compare that to the U.S. where they maxed out their debt to income ratio at 136%. But what’s even more impressive is that Americans have paid their debts down by more than 20% in the last three years! Their debt-to-income ratio is now at 114% and dropping! Sure, it’s partly due to foreclosures and bankruptcies. But give Americans credit…pardon the pun. They found themselves in a deep recession and stopped spending and started paying down their debts in a big way.

You have to remember that there’s always a direct connection between savings and debt. We really can’t do both. The higher our debts, the larger our monthly payments, the less money we have to save. Plus, when rates start to jump again in the next few months, any debt that’s not on a fixed rate is going to become a whole lot more expensive to service each month.

Fortunately, our federal debt is a distant second to the U.S. As a nation, we owe a whole lot less than they do. If you’ve watched any cable TV station, you know that the U.S. Congress is in a prolonged fight over the debt ceiling. With their constitution, the maximum borrowing and debt has to be approved by Congress who controls the money. With a Republican controlled House of Representative, and a Democratic President, it’s been a slow-moving train wreck that has to be dealt with by August 2nd,or the U.S. is officially in deep trouble.

The debt ceiling is 14.3 trillion and they’ve reached it. Right now, their annual revenue from 2010 was 2.16 trillion, but 3.45 trillion in expenses. One of the funniest things, OK it’s not that funny, is to hear lots of politicians claim that it’s not a problem, and that there’s plenty of money to pay their debts.

OK, this is too stupid, even for a fifth grader: two trillion income, three trillion expenses and having to pay 14 trillion of debt. If your family spends 40% more than you make, can you still tell your partner that there’s plenty of income to pay all the bills? There is NOT enough money – hello? The fight over reducing spending and/or increasing some taxes, or closing loopholes, is going to go on for at least another week.

Why do we care? Well, the implications, or even the thought, that the U.S. government won’t pay their interest payments on their debt is pretty scary. We’re their largest trading partner, and we’re neighbors. If, or when, bond holders and the international finance community demands higher interest rates because of the risk, it’ll impact us as well. Remember, what happens in the U.S. happens here – sooner or later. Stay tuned and maybe the adults in the room will find a solution, and not just a temporary fix.

You Can’t Borrow Your Way to Prosperity…Honest!

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This week, Finance Minister Flaherty announced that his department is done with the tweaking and tightening of lending regulations. Well, there’s only so much a government can do for our own good.

Mortgage refinancing is now capped at 85% and you can no longer get mortgage insurance on interest-only lines of credit secured by your home. Now, I guess, it’s up to us – as it has been all along.

While Statistics Canada just released figures that show our net worth is increasing to an average of $184,700 – our debts are climbing way faster. We now owe $1.55 trillion dollars, of which $45,000 is consumer debt, excluding mortgages.

News flash: You cannot borrow your way to prosperity. The majority of people have been trying that and we’re broke. How about trying to get to be debt-free, instead?

We freak out when gas is up 20 cents a litre. Really? 40 litres x 20 cents is eight bucks. THAT is a panic? We get a $500 repair bill and we don’t have the money and it’s an emergency and big stress? Is that how we want live our financial life? When will you get to the ENOUGH scream in your head and choose not to want to live like this anymore?

How sad that we aren’t learning the lesson from the U.S. Their debt levels are dropping like a stone. Last year, they paid down massive averages on their credit cards. In Canada, the average credit card balance dropped $25 from last year, according to TransUnion. Americans are also refinancing in large numbers to get OUT of variable rate mortgages and into fixed ones. And tons are bringing cash to the refinancing, in to pay down their balances. In Canada, we keep taking larger and larger mortgages.

More than half of us now have lines of credit, almost all of which are on a variable interest rate. Rates are heading up – they have nowhere to go but up. So the banks have us exactly where they want us. Owing BIG balances on our lines of credit that we can’t just pay off in a month or two, and rates go up. That’s how banks maximize their profits and how we go broke in a hurry.

Denial IS a financial strategy. It’s just one that won’t work very long. I heard a new radio ad yesterday: Debt problems aren’t about overspending – they’re about emergencies. WHAT? No! Are you nuts? Debt problems are exactly about overspending. If you live on less than you earn, you have money left over.

There is another ad that has a lady saying that so and so credit helped her pay off all her debts. What? They handed you free money? Like $10 or $20,000? NO! You consolidated – you didn’t pay off a dime! And you took a bunch of short-term debt and stretched it to two decades or more. Plus, the majority of people who do that have their credit cards and lines of credit run up again in less than 24 months. It’s not a solution. It’s making the problem worse!

Almost two-thirds of families live paycheque to paycheque. You have to know where you money is going and get in control. You think you know, but you don’t – honest. Spend 15 minutes doing a written budget. Off that, I guarantee most people can find $200 or so in savings right there.

Get yourself a separate savings account and work on saving one week of your net income. That will put you ahead of 65% of people. Thirdly, list your debts smallest balance to largest and start attacking the smallest balance with every dollar you can find and just make minimum payments on all the rest. When that’s paid off, focus only on the next smallest, and so on. There’s a whole section in the It’s Your Money book that’ll walk you through it.

The Downside of Low Interest Rates

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Boy, did we Canadians go on a debt binge last year. Our total consumer debt, excluding mortgages, reached $1.4 trillion at the end of 2009. We are now officially the most overextended country of the big 20 developed nations. For all the pain we see from US families, we now owe more than Americans, on a per capita basis, and even more than the average Greek family! Right now, we are in debt $1.44 for every dollar of income. If there were to be a setback in the economy again, we’d be in big trouble.

Or, as we talked about a month or so ago, when rates keep climbing, we’re in the same trouble. Don’t forget, consumer debt, other than probably our fixed-rate car loans, most everything else from lines of credit to credit cards are on variable rates. That means, rates go up, you’re paying that increase the following month.

Yesterday, the Bank of Canada raised interest rates another quarter of a percent for the second time. On each $100,000 of debt that is not on a fixed rate, these two rate increases will cost you $500 a year and rising.

Behind the scenes, the federal government is taking steps to clamp down on our debt loads. A few months ago, the Federal Finance Minister announced changes to the down payments for mortgages, and the total that can be refinanced on a home.

The next wave of pressure, and nobody has talked about this, yet, is your credit cards. Starting in a few months, your minimum payment will be going up. The good news: you’ll have it paid off faster. The bad news: It’ll hit your budget to pay more as a minimum payment.

Starting with MBNA, the largest issuer of MasterCards in Canada, August will see a new and higher minimum payment. They will be the first, but not the only ones, to change the way the payment is calculated.

Why? Remember that I always say what happens in the US will come here? Well, their new credit card regulations require a box on your statement to show how long it would take to pay off the balance when making minimum payments. That will happen in Canada this fall, too. So when they increase your payment, the staggering time it’ll take to pay it in full won’t look quite so ugly when you see it in a few months.

The third reason, and it’s a big one, is that our debt load has started to increase the arrears and write offs that card issuers are having. So if they increase your payment, they get paid back faster, and have less risk. But we can also start to look for limits to be cut back for a ton of people in the next wave of clam downs. In the US, $1.5 trillion has been cut from credit limits and they’re not done yet.