The year of borrowing dangerously is just about over.
Which brings us to 2012, the year of paying down debt. Don't borrow less next year. Actually cut the amount you owe.
Here's how to do it. If you're seriously indebted, forgo contributions to registered retirement savings plans and tax-free savings accounts for the next 12 months. Instead, use the money to pay down your credit card bill, your line of credit, your car loan or mortgage.
Investing experts will say that only through consistent saving over the years will you accumulate enough money to retire comfortably and reach your other financial goals. But that's like telling someone with chest pains that exercising regularly will help them live a long life. When we solve this country's debt problem, the issue of whether we're saving enough for retirement will take care of itself because people will have more money to contribute to their RRSPs.
We need a year of paying down debt because the past 12 months have seen Canadians increase the amount they owe to dangerous levels. Earlier this week, Statistics Canada said the ratio of debt to personal disposable income was just under 153 per cent as of Sept. 30, which is close to the level reached in the United States just before its economy stalled.
Low interest rates make it almost a joy to borrow now. Rates on home-equity lines of credit are between 3 to 4 per cent, and you can get away with paying just the interest you owe on a month-to-month basis without attacking the principal. Five-year fixed-rate mortgages are available as low as 3.2 to 3.4 per cent, which has to be right up there with the best rates ever.
Rates will rise, though. When they do, what's affordable today will become unbearable for some. Bank of Canada Governor Mark Carney said this week that our greatest economic risk is related to household finances. Did that sound familiar? Mr. Carney said virtually the same thing a year ago, although the economic backdrop was quite a bit different.
Back then, it was widely thought that the global economy was on the move and that interest rates would have to rise from the low levels they'd been at since the financial crisis. You know how that turned out. So sour is the global outlook today that interest rates are expected to remain low for the next year or so at least.
Canadians continue to borrow their brains out, which tells us that low rates carry more weight than economic uncertainty. But there's more to our borrowing habit than that. Wage increases have, according to federal government figures, risen by an average 1.8 per cent in both 2010 and 2011. Inflation is running at close to 3 per cent, which means families must get by with less money after expenses to avoid borrowing.
The fever to buy that so many people feel is also a problem. Check out the Boxing Day sales ahead. People will have just spent massively on Christmas, but they'll be out there jostling to buy picked over remnants.
If you owe a lot, skip the Boxing Day shopping excursion this year and then skip your RRSP and TFSA contributions for 2012. Channel the money into your credit card first because carrying a card debt from month to month is arguably the worst of all financial sins. That's because the interest rate is typically in the area of 19 per cent.
Next, try to get your credit line down to zero. Don't be one of those people who regard their minimum monthly line of credit payment as a fixed expense, like hydro and water. When your credit line is down to zero, use the money you were paying monthly to contribute to your RRSP or TFSA.
Finally, pay down your mortgage at least a little. The more you hammer down the outstanding balance, the easier you'll find it to manage when you have to renew at a higher rate in the future.
If your debts are so onerous that you gave up on RRSPs and TFSAs a while ago, then make 2012 the year you ask for help. Try negotiating for a lower rate on your credit card. Consult a non-profit debt counselling agency in your community. Ask your banker or mortgage planner about refinancing your mortgage or arranging a consolidation loan.
The year ahead is an opportunity to address debt on your own terms. Don't blow it.
Consider focusing your financial resources in 2012 on debt repayment if you:
Have a credit card balance that you've been carrying for months.
Have a steadily growing credit card balance.
Have no immediate prospects of paying your line of credit down to zero
Extended yourself to buy a home and wonder how you'll afford to renew your mortgage at higher rates.
Have a vehicle loan that has proven too big to manage comfortably.
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