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A financial plan can help balance savings and debt

Thrifty Canadians are becoming an endangered minority in a population that is racking up exorbitant levels of debt - enabled by record-low interest rates during the recession - and neglecting to save enough to pay it back.

It's becoming such a problem that even the Bank of Canada, which set the key lending rate at a historical low 0.25 per cent to stimulate borrowing during the recession, is warning consumers to get a grip and reduce the ratio of what they owe to what they have in the bank.

"Despite the buoyancy of the housing market, the debt-to-asset ratio has risen to its highest level in more than 20 years," the central bank's chief economist, Mark Carney, said earlier this month as he noted interest rates are on the rise.

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If so many are falling afoul of the debt trap, financial planning must be really hard.

Not really, financial advisers say: You just have to realize you're going to need it and decide to put a plan in place.

Even the most indebted Canadians can make incremental steps toward creating a more holistic financial plan that balances the many factors that affect an individual or family's financial situation. The concept is known as "comprehensive financial planning," says the Financial Planning Standards Council.

Unfortunately, it's practised by only a small, though contented, group of consumers, according to a recent survey by the council that found the two-in-10 Canadians who do it reported greater levels of happiness and peace of mind.

So, if comprehensive planning makes people so much happier, why don't more of us try it out?

Likely because many believe that the level of planning required for that kind of stability involves an overwhelming sacrifice, says Tamara Smith, vice-president of marketing and consumer affairs at the council.

"But saving or having a financial plan isn't about putting your life on hold to live some dream far into the future - it's about balancing the needs and wants of today with your life goals and retirement in the future. You don't sacrifice one piece for the other."

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There are six basic components of comprehensive financial planning: household budgeting, tax planning, retirement planning, estate planning, asset management/investing and debt or risk management.

Ms. Smith recommends working with a certified financial planner who can suggest a course of action customized to each individual. But there are some easy steps anyone can take to start down the path toward a comprehensive plan:

- Set a monthly budget and stick to it.

- Scale back but don't completely forgo discretionary spending: Instead of going out for dinner twice a week, make it a more special affair that happens twice a month.

- Pay yourself first: Is there an opportunity to set aside even a small amount of money from each paycheque right away, before beginning to spend on other things?

- Always try to keep your chequebook balanced.

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- Find out how much the interest on debt is costing you each month, not just how much you owe in total.

- Take advantage of tax-free savings accounts.

- Understand employee benefits packages and insurance policies.

She adds that those who take this holistic approach to financial planning seem to be managing debt better and saving for the things that are important to them.

And while financial experts warn about debt levels, consumers report they're not saving enough.

A report from RBC Royal Bank released this week found that many Canadians are having problems juggling their personal expenses and managing debt levels.

Maria Contreras, product manager of savings accounts at RBC, says consumers shouldn't have to look at debt and savings as an either/or option, instead they should see if they can do both.

"The golden rule is to pay yourself first, even if that means only setting aside a small amount from each paycheque," she suggests.

"You should also know yourself - figure out exactly what you actually spend each month by keeping track of everything you buy," she adds.

Little purchases like coffees and magazines, as well as lunches, can really add up, but so can the savings when those small indulgences are cut, she says.

Finally, she says, think about something you'd like to save for - having a goal makes it easier to make savings a habit.

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