When it comes to financial goals, debt repayment is the top New Year’s Resolution for many Canadians. In a blog post I wrote just last month, I discussed how Ontarians are choosing debt over retirement savings. Despite the fact that we’re finally starting to listen to the Bank of Canada’s message that interest rates aren’t going to be low forever, Canadians keep piling on debt. Even if you want to repay your debt, it could take some people a few years or longer to get their debt fully paid off.
Consumer Debt Continues to Rise
The facts don’t lie – Canadians love spending. The household debt-to-income ratio hit a new high in the third quarter of 2013, reaching 163.7 per cent. Although it’s not the best measure of consumer debt, it shows that Canadians continue to take on debt, despite the warning bells.
A recent survey from Equifax paints an even bleaker picture. Consumer debt, including mortgages, in Canada totaled $1.422 trillion in the fourth quarter of 2013, according to credit rating service. When you remove mortgages from the equation, the survey found that non-mortgage debt rose by 4.2 per cent to $518.3 billion from $497.4 billion over the same time period.
Why Are We So Cavalier About Debt?
Many Canadians believe their debt levels are under control – could it be such prolonged low interest rates are giving us a false sense of security? While our parents used to scrimp and save to purchase everything in cash, our generation continues to live beyond our means, financing our increasingly-expensive lifestyle though debt. How can you pay yourself first as many financial experts suggest, when you have a mountain of consumer debt on your personal balance sheet?
“With credit being so accessible, it lulls Canadians into a false sense of financial security when they use it in place of cash,” says Blair Davidson, president of BDO Canada Limited’s Financial Recovery Services practice. “The bills still need to be paid and without cash in the bank Canadians risk losing a lot more than their financial security.”
Credit Makes Spending Easy
Spending today is easier than ever. With the swipe or tap of a card, you can spend hundreds of dollars in seconds. While credit cards are convenient, they remove the pain out of spending. If you paid for your purchases in cash, you might think twice next time you have to hand over five crisp 20 dollar bills for a new DVD box set you don’t really need. It’s all about feeling the pinch of spending.
“Canadians may think twice before spending $20,000 cash for a new car; making installment payments for 60 months do not hurt as much,” remarks Davidson. “Financial security comes when debts are paid and there is cash in their savings account.”
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Tips for Reducing Debt
Actions speak louder than words. To get your consumer debt under control you need to make a plan. Debt reduction doesn’t have to be painful; it’s all about moderation. BDO Canada Limited offers Canadians these suggestions on reducing debt:
- Set up automatic withdrawals from your bank account to pay off your debts
- As each outstanding account is cleared roll the amount into another payment
- Pay off the debt with the highest interest rate first
- Write down where you are spending money to determine if you are using it wisely – if not, make the necessary adjustments
- Keep cash in your wallet and use it rather than your debit card; you may think twice before making a purchase
- When your debts are paid start saving
- Before you make a large purchase, walk away and consider if you can afford it without adding more debt