The economy’s message to borrowers is that these are tense times to be in debt.
Canadians have already reduced the rate at which they’re adding new debt, and they’ve been saving more. But the December jobs report tells us we need to be even more cautious about borrowing and more strategic in our saving.
A total of 60,000 full-time jobs disappeared last month, a dismal result that was not a bit redeemed by the creation of 14,000 part-time jobs. Bad weather may explain the worst of this setback, but not all of it. Just 102,000 jobs were created in all of 2013, equivalent to a puny 8,500 per month.
The economy could bounce back in January. But the trend in employment is weak enough to suggest we introduce a new variable into the analysis of whether to take on big debt such as a mortgage. Let’s call it job dependability.
This term doesn’t just refer to the risk that you or your spouse will be laid off or downsized. You could also be moved to part-time status from working full-time, have your overall work hours lowered or even asked to forgo pay for a few days or a week. Or, your benefits package could be reduced in a way that costs you more for things like dental visits or prescriptions. Any one of these outcomes would compromise your ability to carry debt.
Are you thinking about taking on a mortgage or tapping into a line of credit in a big way? Consider not only how solid your own job is, but also the health of your company and the industry it’s in. If you see a chance your current household income could fall, map out how you’d keep paying your debts. You might be able to exist on less money if you put your household on an austerity budget, but that will mean endless financial compromises and, most likely, extra borrowing on your line of credit or credit card to afford any extras.
You can’t buy a house without a moment of terror about what would happen if you couldn’t pay the mortgage. Mostly, we shrug off these doubts on the understanding that a little risk is unavoidable.
Today’s employment risk level is a notch or two higher than usual, though. We’ve seen rough patches in the job market before, but never with Canadians holding such high levels of household debt. As of the latest report from Statistics Canada, growth in the rate of borrowing was the lowest in roughly a decade, which is great. But our most widely followed gauge of indebtedness, the ratio of average debt to take-home pay, was in the red zone in the latter part of last year at close to 164 per cent.
People keep borrowing because interest rates are low. Ironically, weakness in the economy pretty much kills any fears of imminent rate increases. If we can lose 60,000 full-time jobs in a month, it’s hard to see interest rates rising to any great extent in the year ahead. In fact, there’s a modest level of buzz in financial markets that rates might even fall at some point this year.
As for savings levels, they tend to be volatile from year to year, and even month to month. But in the past year or so, Statistics Canada numbers show a fairly steady increase that suggests a reawakening commitment to saving.
Let job dependability determine your best saving strategy. If your job is solid, then look at retirement and your kids’ college or university education. If not, then start by making sure your emergency fund is well stocked.
There’s an old rule that you should have enough cash parked safely to cover three to six months’ worth of expenses, but that’s unrealistically high for many people. Aim lower if you have to, and keep your line of credit in reserve if you blow through your emergency savings.
The best use of your savings may actually be to pay down your debts. Clear a debt and you’ll instantly have money to contribute to savings. Being debt-free also takes a bit of the stress out of losing your job or having your income cut.
With retirement savings season at hand, you’re going to feel the pressure to hand your money to banks and advisers. This year, the message the economy is sending is to take care of your debt.
Read what priorities people are setting for 2014 in this thread on my Facebook personal finance page, which recently reached 35,000 followers.