Ben Plewes BA (Hons) LBIPP
Our household looks like something out of a sit-com when we talk to our children about debt. There I am, wagging my finger and lecturing them about living within their means. And there is my husband, rolling his eyes, telling the boys it's okay to use someone else's money to equip yourself to make money.
Of course, we are both right on this: It often does take money to make money, and you shouldn't dig yourself into a hole through reckless spending. In fact, about 54 per cent of Canadians take on debt to purchase property and almost a fifth borrow to go back to school or upgrade their skills, according to research by Investors Group.
But two-thirds of Canadians also use debt to help fund daily living expenses, a quarter use it to help pay for entertainment and recreation, and almost one-third use it for travel and vacation costs, the survey shows (obviously, there's some overlap in the categories there). Seventeen per cent admit to using it for "impulse purchases."
Almost 60 per cent say they are uncomfortable with debt -- and a fifth say that their debt levels haven't changed in the past 20 years.
It's all right to accumulate debt for a purpose and to have a workable plan to repay it, says Investors Group tax and estate planning expert Aurele Courcelles. But he adds, "A lot of individuals are in for a rude awakening."
Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada, sounds even more concerned. "Once interest rates start rising, people having financial difficulty today will be unable to afford the basic necessities of food and shelter, and driving a car will be considered a luxury."
How do you manage debt? Here are some tips:
1. Take a step back and assess the situation, Mr. Courcelles says, adding: "If you cannot afford to cover your monthly bills, you know you have a problem." Set a goal reflecting when you want to be financially independent and debt-free, and go after that mercilessly, Mr. Schwartz says.
2. Check your impulses. Weigh your options and make prudent purchasing decisions. If you have your heart set on a particular car, consider buying it used, rather than brand new, says Mr. Courcelles. Determine what you need as opposed to what you want. "You need food and shelter; you want to add to your wardrobe," Mr Schwartz says.
3. Focus on consolidating debt. Look at the interest rates and payment terms on your debt. Credit card debt is the worst, because it typically carries the highest rates of interest. Can you roll your credit card debt and car loan into a personal loan or a line of credit with lower interest rates? The saving in interest costs could be significant. "It's not realistic to think you can pay all this debt off tomorrow. But you could start by taking control of that debt and trying to reduce your interest cost," Mr. Courcelles says.
4. Make saving money a priority, says Mr. Schwartz. Try to build an emergency fund that equals three months of expenses.
5. Establish a good credit history. Make sure you pay your credit card balance off every month, says Mr Courcelles. And be careful when it comes to co-signing for anyone else's loans -- any default will appear on your credit report. Kids are notorious for asking for co-signers. Better to teach them well when they're young, even if you end up sounding like Marge Simpson.
Sonali Verma