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debt: canada’s borrowing binge

You can’t stuff massive amounts of debt into our household budgets without something giving way.Fuse

This is part of a Globe series that explores our growing dependence on credit – from the average household to massive institutions – and the looming risks for a nation addicted to cheap money. Join the conversation on Twitter with the hashtag #DebtBinge

We're drunk on debt. It's impaired the judgment of even our stars of personal finance.

As part of our series on debt, we built an online debt diagnostic tool that shows people how their finances are bearing up under their debt loads and allows them to compare their situation to others. Of the 55,000 or so people who have used the debt tool so far, 68 per cent provided answers suggesting their overall finances are in balance and another 25 per cent have some challenges but are doing OK.

The concern with these people is less about their debts than it is the amount they're saving. In fact, just 47 per cent of the people who used the debt diagnostic tool pass the most basic measurement of saving, which is to put away at least 10 per cent of gross pay. It's easy to be complacent about high levels of household debt in Canada because default and bankruptcy rates are so low, and interest rates as well. But you can't stuff massive amounts of debt into the household budgets of the nation without something giving way.

As my colleagues Tavia Grant and Tamsin McMahon pointed out in the introduction to the series on debt we began last week, about 12 per cent of households are considered "highly indebted" and carry about 43 per cent of overall household debt. But just 6 per cent of people who used the debt diagnostic tool provided answers showing they were in difficulty or deep trouble. What this tells us is that the people who used the debt tool are more financially solid than the broader population.

Something else to consider is that people answering questions like the ones in our debt tool tend to want to look their best, even in an anonymous setting. This may explain why a remarkable 54 per cent said they have a few months' salary set aside for emergencies. That number surprises on the high side.

This background is what makes the numbers on saving so interesting. Among the financially elite people who used our debt tool, not even half are saving 10 per cent or more. These are people who rarely, if ever, overdraw their chequing accounts, who pay their bills promptly for the most part, who find their mortgages to be manageable and who generally use their lines of credit responsibility. Yet some are not saving as much as they need to.

Apparently, six years of low interest rates have degraded our judgment about borrowing. We're willing to devote ever larger slices of the household budget pie to debt repayment. Something has to give, and it's savings in some cases.

Not everyone can or needs to save 10 per cent, mind you. Young families with kids may have to wait until after the daycare years to get up to that level, and people with rich defined-benefit pension plans (guaranteed benefits for life) may not need to. On the other hand, lots of people will have to do better than 10 per cent.

In a Q&A I did with David Chilton a few years ago on his book The Wealthy Barber Returns, he says the consensus is that people should save 10 to 15 per cent of gross pay. But he added that this rule is based on the idea of people saving over a lifetime. Late starters probably have to save 15 to 18 per cent.

By some measures, the run-up in debt is not a serious problem. As noted by Bank of Montreal chief economist Doug Porter in a counterpoint to our debt series, the number of mortgages in arrears has fallen to pre-recession lows. He also said that low interest rates have kept the burden of carrying debt in line with the average trend from 1990 to 2004, and that there are other successful industrialized countries with higher debt levels than us (Denmark and the Netherlands).

We also need to recognize that just as the national housing market figures have been hijacked by the insanity in Toronto and Vancouver, national debt figures reflect a mix of high-stress cases and the 68 per cent of people who used our debt tool and were deemed to be in good shape overall.

But the sketchy savings numbers uncovered by our debt tool suggest we need to open a new line of questioning on debt. As more of our household budgets go to debt repayment, what is giving way to make room?

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