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Hey, all you heavy borrowers. It's time for a Plan B

Here's your problem, all you heavy borrowers out there.

You're acting as if economic growth still existed. That is so yesterday. In the economy of today, it's all about takeaways.

Forget the economists' economy, where growth is measured through something called gross domestic product, which is the dollar value of all goods and services produced. GDP numbers for the first quarter of 2012 suggest an annualized growth rate of 1.9 per cent, which is kind of lame but still suggestive of conditions where things are getting better for individuals and business.

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In the real economy, where families work and spend, things are getting worse. If people haven't noticed, it's probably because they've grown comfortable with borrowing to provide what the economy can't.

A borrowing binge fuelled by low interest rates has left the average household owing $1.52 for every $1 of disposable income. Spending less than you make is the foundation of financial success, but let's not be excessively judgmental about high levels of borrowing because families are making do with less and less money every year. Statistics Canada reported this month that the median after-tax income for families of two or more people was in the $65,500 range from 2008 through 2010. Add inflation to the analysis and you're left with shrinking incomes.

The logical response when your income declines is to make a matching reduction in your spending. But that's tough to do in a culture and economy based on growth. The growth mentality says there are pay increases and bonuses in your future, so what's the harm in buying an expensive house or digging deep into your line of credit? It says that while unemployment exists, it's not something you really have to worry about. It says that we as a country will be more prosperous in the future than we are now, and that we will all live better lives.

The actual performance of the economy hasn't justified such thinking since 2007, when the global financial crisis began. But it's hard to accept this after living through the boom years of the two previous decades. The economy had some ups and downs over that period, but it trained us to think and spend big.

Now, it's doing the opposite. Many people are worried about a recession in the United States and Europe. China, the growth engine that was going to drive commodity prices to ever-increasing heights, is slowing down. Unless things improve, that tepid first-quarter GDP growth in Canada might just turn out to be a high point for the year.

Growth isn't stone cold dead, but it might as well be in making your financial decisions for the next few years. Buying an expensive home with the expectation that your income will grow into the payments is risky. So is any type of borrowing that limits your flexibility to cope with economic takeaways.

An economy that isn't growing makes you poorer, and we're not just talking here about how routine inflation erodes your spending power. Governments are struggling with debt loads of their own, and that means austerity measures such as spending cutbacks and layoffs are here for the next few years. Tax increases occur only at municipal levels these days, but a province or even the federal government may at some point have to fall back on this once-commonplace tool for raising revenues.

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Rising house prices have made us seem richer in our minds and given us ever-increasing borrowing power through home-equity lines of credit. But no aspect of the economy seems more detached from the global reality than the housing market in some cities. If housing prices were to fall, that's yet another takeaway.

Here's one more for you – returns from savings and investments will be subdued for the next few years. That was the conclusion of a panel of a dozen experts I consulted for a recent Portfolio Strategy column (read it here: http://tgam.ca/DdtJ).

We all need escape hatches in our financial plans right now. Think about what you'd do if you were laid off, if your pay was cut or if you simply had to go a few years without pay increases. Consider how your retirement plans would be affected if you earned investment returns in the low single digits for a while.

Growth used to solve these problems and many of us are at least subconsciously expecting it to keep doing so. Get over it.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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