Time to get spending under control
Sorry to be the bearer of bad tidings, but now that Christmas is over, it seems a sensible time for the financial reckoning to begin. And this doesn’t just include holiday spending. It seems we Canadians have been on a bit of a buying spree for some time.
According to Statistics Canada, our household debt burden hit a record high in the third quarter, with our debts growing faster than our incomes. Our debt-toincome ratio rose to 163.7 per cent, meaning that Canadians owed almost $1.64 for every dollar of disposable income they made.
If that is not enough to shock you into slicing up a few credit cards, consider this:
According to the Bank of Canada, the worst household debt is increasingly concentrated among younger Canadians, which puts them more at risk in an economic downturn. Younger borrowers with large debts and often lower incomes are at a greater risk of defaulting on their mortgages — and this has the BoC a bit jittery about a housing crash, at least in certain markets. And that means your house — your retirement nest egg — will no longer be worth as much as you thought it might.
Coupled with that, economists are warning that because the U.S. Federal Reserve recently raised interest rates, our era of historically low interest rates might be coming to an end in Canada, too. Not immediately, but at some point.
And if we are already in debt up to our eyeballs, an interest rate hike of a half or full point could make a big difference. For example, a full point increase on a fiveyear fixed rate mortgage could mean an additional $250 a month on a $500,000 home. Can a household already saddled with a high debt load — credit card bills, lines of credit, car payments — handle that kind of increase? Possibly, as long as job circumstances don’t change. But what about another point on top of that? And another one? The BoC said our financial vulnerabilities were not out of control, but warned they were creeping higher.
The good news is the federal government is putting in place measures to curb excessive borrowing. And the BoC is not saying rates will rise any time soon — in fact, it has hinted at using negative interest rates to kick-start the economy. So there is time for us to get our financial houses in order. But if there was any doubt, now would be the time to start. To start living within our means. To start thinking about needs versus wants — and to focus on things that really matter. Not just for peace of mind, but greater peace in general.
Here’s a thought from Martin Luther King Jr. — part of a call for worldwide fellowship — to contemplate in the new year: “We must rapidly begin the shift from a thing-oriented society to a person-oriented society.” It would appear that has not happened rapidly enough.
Cheryl Stepan