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Woman managing the debt ***These graphics are derived from our own 3D generic designs. They do not infringe on any copyright design.

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Advisors who advised clients to repay their debts while they were locked down during the early waves of the COVID-19 pandemic have their work cut out for them if they want clients to continue the aggressive pace many took.

Canadians repaid $20.6-billion in non-mortgage debt, including $16.6-billion in credit card debt, in the first 10 months of the pandemic, according to a recent Statistics Canada report. People with the lowest credit ratings saw the biggest drops in outstanding balances, suggesting that financially vulnerable people were able to make significant strides toward improving their financial affairs thanks to reduced expenses and introduced government support.

However, new non-mortgage borrowing was already steeply on the rise again in March and April of this year, hinting that old habits are kicking back in.

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“You could have definitely rebuilt your credit rating during COVID-19,” says Laura Southall, financial advisor at Assante Financial Management Ltd. in Kingston, Ont. “People were forced into not spending. [But now] we’re reopening and everybody’s really eager to travel, go to the movies, go to restaurants … and I worry that we’re just going to go back to the way things were when Canadians were overspending.”

Ms. Southall saw an uptick in clients and prospects approaching her about all their financial affairs, including debt, during the pandemic.

“People all of a sudden had all this free time to review statements, look at things online, look at interest rates, look at their loans [and] were showing an amount of interest that was unparalleled prior to COVID-19,” she says.

Ms. Southall helped them create budgets and plans to repay a reasonable amount of debt on a regular basis. She also encouraged them to synchronize payments with their paycheques and automate them.

Generally, she recommends that clients split available funds 50/50 between debt and savings rather than putting all extra money toward repaying debt. The savings will be there to pay unexpected expenses, which can otherwise lead to more debt. This approach also has psychological benefits.

“It’s a very good feeling to see savings accumulate, and it gives people a sense of power and control over their finances, even if it’s small at first,” Ms. Southall says. “If they can do that in combination with paying down debt, and they can see their debt is going down and they can see they’ve got some savings, it’s very powerful and people are often motivated by that.”

Andrea Andersen, financial advisor at Edward Jones in Calgary, is also concerned people will slip back into old spending patterns as pandemic restrictions ease. As such, she touches base frequently with clients to ensure they stay motivated, continue repaying debt on schedule, and have any support they need. It may also be necessary to tweak their debt repayment strategy – for example, increasing the allocation to debt repayment if interest rates rise.

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“It’s not just a one-and-done plan,” Ms. Andersen says. “The other thing that’s really important is to check in on what [clients’] priorities are and keep that ‘why’ in front of [them] all the time. [I’ll ask,] ‘Is that trip more important than being debt-free? What will make you feel better in the long run?’ It’s not the spending that makes our clients happy, it’s the progress toward their goals. And we support them by keeping them focused and helping them make informed decisions every time.”

As bank branches were closed or had reduced hours during the early days of the pandemic, Brandon Silbermann, financial advisor with the Grey Wealth Silo team at Manulife Securities Investment Services Inc. in Waterloo, Ont., received many calls from people referred by existing clients. He was working from home, but open and ready to talk to prospective clients about their financial challenges.

“We were contacted by prospects who were re-evaluating everything,” including debt, he says. “We had people contact us because of job loss, early retirement, or even health concerns. No situation was ever the same … but that opened up a lot of communication.”

Mr. Silbermann says financial habits can improve over time. As with any other skill clients want to develop, he says it takes commitment and often some help from a person they trust, like an advisor. When people say they want to tackle their debt, he finds simplicity works best. A compound interest calculator is one of his top tools.

“It’s a great way to motivate them into becoming more interested in improving their financial habits,” he says. “It makes it feel more tangible and achievable. If that creates a little bit of a spark or excitement, you know you’re getting somewhere, and you know that, over time, this person is probably going to … be a good client.”

Mr. Silbermann believes it’s important for clients to write down debt repayment goals so they feel more accountable to them. Encouraging incremental improvements can be effective – for example, bumping up monthly allocations to debt repayment by $50 or $100. He adds that once high-interest debt from credit cards and payday loans is paid off, repaying other debts may not be the top priority.

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“Mortgage rates are at all-time lows. Does it always make sense to allocate money to pay off [a mortgage] faster when you could really help your savings grow in other vehicles, like a tax-free savings account or a registered retirement savings plan?” he asks. “You can use debt to your advantage if you plan correctly.”

Overall, Mr. Silbermann feels the profound impact that the pandemic has had will help keep people who started out on a journey toward lower debt and better credit ratings on track.

“Everyone’s going to remember the pandemic [for many] years. They’re going to refer back to it … much like people constantly refer back to the global financial crisis of 2008,” he says. “A lot of people are going to learn from this experience and keep to a lot of the financial habits they learned through the pandemic just because of how much this changed everybody’s lives.”

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