Debt gets a bad rep – but really, debt isn’t the bad guy. It’s a tool, and depending on how you use debt, it can either help you or hurt you.
We know that household debt is at an all-time high in Canada and continues to climb. However, a new report from BMO Wealth Institute reveals that a growing number of Canadians are using debt as a means to boost their household wealth. 22 percent of respondents said that they were actively using debt as part of a strategy to boost their assets (i.e. real estate, RRSPs and other investments).
Additionally, the report found that:
- 36 percent of respondents say that debt makes them nervous or uncomfortable
- 20 percent aren’t using debt at all, and feel that they don’t need it
- 16 percent are using debt in order to help family and/or friends
- Only 7 percent say that they are using debt to feed their shopping and consumerism.
“Debt is in many ways a necessary evil in our society, especially when it comes to larger purchases. When used responsibly and strategically, it can help you create wealth and set you on the path for financial success,” says Jeff Schwartz “The flipside, of course, is that the very same tool that can set your household up for success can also be the source of your financial troubles. Bottom line? Regardless of your attitude or habits around debt, live within your means.”
What is your best bet to having debt as your friend and not as your financial foe? Here are some tips:
Debt is a means to an end
What this means is that debt is a temporary tool- and not the cornerstone of your lifestyle. Commit to paying any and all debt that you take out as quickly as possible. This means that smaller credit card debts need to be wiped out every month. For larger debts, like installment loans and mortgages, you need to have a detailed budget that supports the goal of paying them down as soon as possible.
Borrow less, spend less
Minimize the amount of debt that you need to take out- say for a car or a home purchase- by accumulating a sizeable down payment. This will reduce your payments as well as the length of the term of the loan- which means less interest paid out over time as well.
In addition, smaller payments means more cash flow month-to-month- and that means more wiggle room in your budget.
The biggest culprit behind debt disaster? Unexpected life events (job loss, death, divorce) causing an interruption to your income or an unexpected, substantial expense that you don’t have the cash to cover (house or car repairs).
Even if your focus is paying down debt, putting money aside in your emergency fund is crucial.
If you are looking at using debt to leverage your investments (i.e. your house or RRSP) do a little research ahead of time, because there are tax benefits, including interest charges and other expenses.
Borrowing money to contribute to your RRSP for instance will generate a higher tax refund, which you could then use to pay off the debt that you accumulate. Talk to your financial institution for details.
While these investment strategies can lead to higher returns and greater growth, they are not for the novice as they can carry significant risk. Consultation with a trusted financial advisor is recommended for this type strategy.
How do you use debt? Would you like to pay down your debts and begin to focus on the savings side of your household balance sheet? We can help. Call one of our trained credit 1-888-826-5898 or check out our free online debt analysis tool to get started.