Being Wise With Debt
June 19, 2017Building Your Future
Many Canadians are living in financial chaos that is related to debt and it’s time to get our personal financial house in order by managing debt wisely.
Do you remember the first time you needed to borrow a substantial amount of money? I remember a certain 1978 Pontiac LeMans my wife and I had purchased in 1987 that was definitely starting to show its age. It had a habit of stalling at red lights and not starting once the light turned green, and, when it rained outside – it rained inside too. So in 1990, we took the plunge and bought a used Mazda MX6. We loved that little red car. Everything was manual from the transmission to the mirrors, windows, and seats. But it was sporty, rust-free and reliable. We had to borrow $8,000 to buy it and we repaid the loan in eight months. I’ll never forget how great it felt to make that last payment – knowing the car was all ours and that we no longer owed any money. My wife and I could have waited to buy a new car until we had saved more, but we were spending more and more each month on repairs and that wasn’t the best use of our money either.
Back in 1990, debt was not encouraged in the same way it is today. We had double digit interest rates and the total household debt to income ratio was 88%. Today, that number has risen to 169%, which is almost double what it was in 1990! A recent Ipsos survey, conducted on behalf of the accounting management firm MNP, found some staggering stats:
- Over half of Canadians are less than $200 a month away from not being able to pay their bills or meet debt obligations.
- 60 per cent don’t fully understand the impact of rising interest rates on debt repayment.
- Almost half say they are concerned about debt.
- Four in 10 regret the amount of debt they have accumulated.
How is this possible and why is it getting worse? There are two significant factors – gaining access to credit has become easy and historically low interest rates have dampened our fear of borrowing money – causing us to lose perspective on the risk associated with high debt.
Acquiring debt does carry risk and that’s why it should be managed wisely. Even debt for items that the majority of people borrow money to pay for like education, a home mortgage and a vehicle should be considered carefully.
Things to consider before taking on debt:
- Make sure your re-payment amount isn’t more than you can manage. You shouldn’t be spending more than about 30% of your gross salary on housing and your total debt re-payments shouldn’t take more than 43% of your gross salary. Find out if the loan is secured, look for the best interest rate and ask if the rate is guaranteed throughout the term of the loan.
- Ask your lender if you need to insure the loan in case of illness, disability or death – this may require an extra fee or you may purchase additional insurance from your current insurer.
Canadian consumer debt is at an all-time high and Canadians continue to borrow money for non-essential items. In 2016, Equifax Canada reported that by the end of the third quarter, Canadians owed $1.7 trillion in consumer debt (excluding mortgages).
So is all of this debt just rampant consumerism? Certainly a good percentage of Canadian debt can likely be attributed to our fascination with “stuff”. Consumerism is wrapped up in our desire to acquire more for ourselves when we may already have enough. If you are currently in a high debt situation there are some changes you can make immediately.
Six tips to manage debt wisely:
1. Pay at least the minimum on each debt – pay off as much as you can each month. Try to pay more than the minimum owed but never pay less to protect your credit rating. Always pay down the loan with the highest interest rate first and as you pay off each loan, start paying more on your next debt.
2. Ask for a lower interest rate – if you have a good history of paying on time, your lender may be willing to reduce your interest rate. It doesn’t hurt to ask.
3. Stop using credit cards – it’s too easy to overspend when you pay with a credit card. Put the cards away and don’t use them to purchase anything until you’ve paid them off.
4. Consider a consolidation loan – reduce your interest charges by grouping all of your debts into one low-interest loan. You could consider a home-equity loan or a line of credit. However, you must stop accumulating debt while you pay off the consolidation loan.
5. Reduce your budget – check to see where you could cut back on things like eating out and other non-essential purchases. Use this money to pay down your debt!
6. Talk to a professional – managing debt is easier with the help of a qualified and trustworthy Financial Representative who will help you categorize your debts, assign measurable goals and set realistic plans to reduce and eliminate your debts as efficiently as possible.
Always longing for more can lure us into a debt trap where we are never content with what we have. The writer of Ecclesiastes 2, who denied himself nothing and acquired great wealth said, “…Yet when I surveyed all that my hands had done and what I had toiled to achieve, everything was meaningless, a chasing after the wind; nothing was gained under the sun.”
Being wise with debt is a critical part of a sound financial plan for all of us. As you will read in the book, Your New Money Mindset, good money strategies by themselves cannot end the cycle of money problems once and for all. If we want to truly break free from the consumerism that drives us, we must develop a new relationship with money.
Join us on the journey to a healthier relationship with money by visiting faithlifefinancial.ca to request a FREE copy of the book, Your New Money Mindset (while quantities last). You may also connect with one of our Financial Representatives who would be happy to conduct a free financial review with you
FaithLife Financial is a financial services organization that helps Christians blend faith and finances to be wise with money and live generously – serving God, families and communities.