When you think about it, debt is a lot like gambling. When you roll, the dice, sometimes you walk away with money in your pocket and other times you take a financial blow. The same can be said about debt.
There is an element of risk present when you spend more than you make. What many debtholders don’t take into account is “what if”. What if one of the myriad economic forces that is beyond your control changes? Are you willing to roll the debt dice? Is debt worth it? Maybe 2016 is the year to break your debt habit.
- According to Statistics Canada, the average debt-to-income ratio in Canada is just under 165 per cent. That means for every dollar you make, you owe almost a $1.65. It doesn’t take long to sink swimming in that kind of debt.
- Canadians spend nearly 14 percent of their after-tax income servicing their debt.
- “High Risk” households (households where the debt-to-ratio income exceeds 350 percent) have almost doubled since 2008 (prior to the global financial crisis) from 4 percent to 8 percent, according to the Bank of Canada.
“Canadians continue to put themselves at risk by ramping up their debt. Low interest rates mean more people can buy more “stuff”. Even if people are loading up on so-called “good debt” (i.e. housing and home improvements) it’s not good debt if you can’t comfortably afford it.” says Jeff Schwartz, executive director at the Consolidated Credit Counseling Services of Canada.
“This vulnerability is compounded by the fact that the average consumer doesn’t have control of the variables that are currently allowing them to afford to take on these debts. If you are already stretched too thin, it doesn’t take a strong economic headwind to topple that house of cards.”
The good news for debtholders is that they can decide to take control of their debt. Is 2016 the year to break your debt habit and pay down to live happily ever after, rather than buy now, pay later? Still not convinced? What if you experienced any of these in 2016:
Interest rates and your mortgage
The low interest rate environment has lulled homeowners into a false sense of security. Even though property prices have skyrocketed in some centres, consumers may not see those gains because they have taken out those increases in the form of home equity lines of credit and have borrowed to their absolute max. If this is the year that rates go up, what will that mean to your debt service dollars? Are you already spending more than you make?
Sure, you’re the employee of the month, but does that mean your job is safe for the whole year? One of the sad realities of our economic times is that people frequently experience job loss, whether from downsizing or other circumstances.
Illness can seriously hinder or reduce your income. How long would you be able to pay your current debts without your income? Do you have any savings or a “Rainy Day” account to carry you until things improve?
Consumers feel the pinch of inflation in paying for their daily goods- like gas and food. Food is expensive now and is expected to continue to increase throughout this year. Chances are, your income won’t grow at the same rate. This expense will take a bigger bite out of your net pay, leaving you with even less to address your debts.