Recently I was asked for some comments regarding the increasing level of debt carried by the average Canadian. I absolutely have some comments on that topic. In fact, it's a recurring theme in this column.
Study after study has come out showing that Canadians carry a scary amount of debt and/or are simply not saving any money for the future. It's precarious, and it undermines the financial stability of both individuals and the entire nation.
Right now borrowing money is a relatively easy thing. Interest rates are cheap and, if you have a decent credit rating or some collateral, someone will probably give you some money.
Here's the problem. As a whole, Canadians are taking full advantage of this easy access to cheap money.
Sometimes this is smart. There is nothing intrinsically wrong with prudently using borrowed money to help you achieve your financial objectives.
But sometimes this is really, really dumb. And that's the type of behaviour that I want to put in the spotlight. Way too much of this borrowed money is to support a consumption lifestyle for people living beyond their means.
In other words, there is nothing wrong with using borrowed money to do something like help buy a house that you really can afford to buy. But there is a lot wrong with people going into debt up to their eyeballs, sacrificing their financial stability, compromising whatever they hold dear, and wasting their precious money on interest payments for years to come, just to buy crap that they don't really need in the first place.
Let's play a little game. I'm going to list off some products and services. You determine whether these are things that you need, and which are simply things that you want.
The first list: iPhones, iPads, iPods, HD televisions, brand new vehicles, ATVs, snowmobiles, dirt bikes, cigarettes, tattoos, manicures, booze, expensive restaurants, the premium cable package, a night out at the movies or the bar, and a $300 pair of shoes. Basically, all the stuff that you like and crave.
The second list: a retirement income that you can't outlive, the education of your kids and grandkids, the ability to care for your loved ones in times of need, making a meaningful contribution to the charitable causes most dear to your heart. Basically, all the stuff that really counts.
If you find yourself spending all of your money on the first list, and none of your money on the second list, then you might want to have a little talk with yourself.
But here's the problem. The first list is the stuff that people like. It's the stuff that people want. It's the stuff that people tell themselves they need. It's the type of stuff that people are eagerly willing to go into debt for.
I'm not saying that you can't buy the things that you want. What I am saying is to be super-careful that you know the difference between wants and needs, and try your utmost to avoid going into debt for mere wants.
You see, here's the real danger. You might be able to carry your current debt load if the status quo is maintained. But what happens if your income fluctuates? What happens if someone in your family has a health scare? What happens when interest rates go up, as they inevitably will? Currently you might be able to eke barely by, but what are you going to do when things change?
So let's say that you happen to be one of the many, many Canadians that need a spending behaviour makeover. You want to be able to retire, you want to educate your kids, you want to pay off your mortgage, but right now that's not where your money is going.
Okay, well, let's start with how much money should be going towards your objectives in the first place. Now, every situation is different, but for discussion purposes let's start with the objective of saving10 percent of your income. This is the money that is going to be used on the things that really matter to you personally.
That's right, your goal is to put 10 percent of what you make towards the things that are really important, and live off of the other 90 percent. It's not too much to ask. In fact, it's the amount that is going to allow you to do the things that really matter to you.
Now the cold, hard mathematics. If your goal is to save 10 percent of your income, and you make $60,000 per year, that means that you have to save $500 every month. And for most Canadians that's just not happening.
But it can happen for you. Here's how.
The first thing starts with understanding and accepting and embracing that you are entitled to very little in life. If you want to retire early and with the income necessary to maintain your standard of living through your lifetime, you are going to have to do something about that. If you want to put your kids through university, you are going to have to do something about that. If you want to get out of debt, you are going to have to do something about that. These aren't typically the types of situations that spontaneously resolve themselves.
So the first thing is to be clear in what you want to achieve. If you know the goal you can start working towards it.
The second thing is be realistic. If you make $60,000 a year now, and you are currently spending $60,000 (or more) per year, likely it is not realistic that overnight you will suddenly save $500 per month.
So start slow. Build up a tolerance for it. Make savings a habit. This isn't a sprint to the finish, it's your life.
If you were going to get off the couch after years of inactivity you wouldn't try to run a marathon on the first day of a new physical fitness program. You'd build up to it.
Maybe on the first day you go for a brisk walk. Maybe by the end of the first week you build up to a jogging a few blocks. Over time, once you develop some endurance, you can be more ambitious about your efforts.
It's the same with developing savings habits. You need to get in shape. If you aren't in the habit of saving now, then start simple; maybe with $50 or $100 per month. After a few months, once it becomes easier, then you can bump it up.
For now, I don't even really care what you do with the $100 per month. Just don't spend it. Put it against a credit card balance, put it against your mortgage, put it in an RRSP, put it in a TFSA, put it in a cookie jar, it doesn't matter. Just start doing something, and build it up over time.
Today we aren't talking about getting the best possible gas mileage from your money. We are talking about changing your spending behaviour. And its important, because we are talking about aligning your spending with the stuff that really matters to you.
These debt levels are undermining the ability of Canadians to do the stuff that is truly important to them. We need to take control of that. We need to control our debt, or it will control us.
Decades from now you won't even remember if you had the fanciest smart phone in 2012. But you'll know for sure whether or not you saved enough money to do the things that matter most.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at [email protected] or www.bradbrainfinancial.com.
