Yes, we’re entering into the second month of the of the year…
And as we look forward to the upcoming months filled with more tweets from President Trump, buying of virtual cats with Etherium and creating some better money habits – this may just be the year to advancing your dollar army towards paying off debt.
Because, here’s a headline from CBC News:
“Canadians owe $1.71 for every dollar of disposable income they have – a new record high.”
I don’t know about you, but that really grabbed my attention.
That Canadians corporately carried more than $2.1 trillion in debt as of the end of last September – is scary.
Why is this scary, exactly?
Maybe you have been following the fantastic series of The Debt Dispatcher?
Maybe you don’t know exactly how much debt you’re carrying?
For me, I’ve found it quite freeing to check off debts as they mature...
But the numbers from the CBC article suggests that for many Canadians, it’s getting to a point of desperation.
Here’s why these numbers are scary:
1. We might be over-leveraged on housing.
It seems indicators of mortgage costs are going up. In a 2017 analysis, Desjardins expected approximately a 2% increase over the medium term in rates.
That takes your 25 year, $250,000 monthly mortgage payment at 5% from $1,454.01 per month to $1,751.04 at 7% ‒ or nearly another $300/month.
As of early 2018, all of the “big six” banks have increased their interest rates on mortgages. Rates have been slowly creeping up over the last few years, and closely connected with my second point:
Liquidity may soon be a very real issue.
2. We may not be saving enough.
In a recent survey conducted for CIBC, 15% are most concerned with just paying bills or getting by, whereas 13% said their top priority is growing wealth or investments.
With a recent Ipsos poll indicating that 30% of the Canadian population is worried rising rates could push them to bankruptcy, it seems this is quite plain: we don’t have enough savings in our bank accounts.
3. We might be headed for a cliff.
Successful entrepreneur, Tony Robbins, think we’re just about to see a drop. Yet, he strongly advocates that you stay in the market, as it happens, and in the long-term ‒ we should be okay as the market rebounds.
As he notes in this video, the average bear market lasts about a year.
What are we buying?
So, what do we do about this?
How can we be practical when taking on our debt?
First things first: where are we spending all of our money? This 2015 graphic from Statista is pretty telling:
Aside from paying off debt, this chart is interesting, three observations:
The priority to pay off debt continues to be important for many Canadians.
The survey found that debt reduction or elimination is a top priority for approximately 25% of respondents.
Vacation is also a priority.
In a 2013 CIBC poll, Canadians were spending about $2,600 on March break vacations. Some geographies spent more (Manitoba/Saskatchewan averaged $3,200) – while others spent less (Atlantic Canada was around $1,500).
Of course this doesn’t account for other vacations throughout the year.
If you’re looking for tips about budget travelling, these are good starting articles:
Related: Best Travel Credit Cards in Canada
And we love to eat out.
Dining out also accounts for 31% of the above graph. I’m definitely guilty of this one.
I need to re-read Stephen’s ultimate guide to spending less on restaurants.
Also here’s a 5-step guide to eating right without draining your wallet.
So, what’s the plan?
I don’t know about you, but I’m not going quietly into the night.
Over the last few years, investing, saving and cutting debt has become a priority for me – but I know I need to do better:
Understand what you have coming in as far as revenue:
- your earnings,
- any projected capital gains or
- other income
...and then determine your expenses.
What is fixed (the same every month) and what is variable? Fixed expenses could include things like rent, equal payments for power, internet and so on. Variable costs might include food, entertainment, shopping and others.
2. Your money goals
I would suggest looking at your short-term, medium-term and long-term goals here.
For myself, building savings to around a level of 6-months of earnings is a big goal for me. At the same time, I’m also investing in my RRSP and life insurance (which can later be borrowed against as an asset at the bank or cashed out early, if desired. It’s always good to have flexibility on your side).
Also, I’m focused on paying down the “outlay” debt that I have per month. Things like a car payment going out every month are a serious dent in the wallet, so I’m looking forward to when I finish paying for that very soon.
In another world, you might even ask the question (if you’re being REALLY bold), do I need the car I have?
3. Getting it done
The next step is to actually...do it.
It may be that you have a savings goal (to buy that dream toy you’ve always wanted) or, perhaps you want to clean up all your debt in the next three years. These two are very interrelated – so, determining your priorities is important.
And if you have a spouse/partner/kids/etc at home? Bring them along to your budgeting journey and work towards your collective financial goals. A good exercise for increased accountability.
The year to slay that debt starts now
Looking to binge-read? We got you fam: