Clark Wealth Management Group - ScotiaMcLeod Fredericton

“If you find yourself in a hole, the first thing to do is stop digging”

As clear as this advice is, as it relates to personal indebtedness of Canadians, the message is not getting through.

Despite warnings of the problem of growing consumer debt from credible organizations like the Certified General Accountants Association of Canada and the Bank of Canada Canadians appear to remain in denial.

Not only are we now collectively further in debt than we have ever been at about $1.3 trillion at last count, but the growth of household debt compared to income is also at new records.

The CGA Association report highlights four main concerns. The first is that household debt is rising, particularly in the personal line of credit and credit card categories. The second concern is that the household balance sheet (i.e. what we own less what we owe) continues to deteriorate and the pace of that deterioration is accelerating somewhat.

The third concern is particularly troublesome and it is that consumer debt is being used for consumption rather than asset accumulation. Known as robbing Peter to pay Paul. In other words, we’re paying the bills with borrowed money instead of just using debt to buy durable consumer goods or other assets such as real estate or investments. If people are having to borrow to pay bills while rates are this low, imagine the impact on those households when rates go up. Not a pretty picture.

The final concern is that in the current global economic environment, the prospects for improving household financial security are low. Job and income growth is slow and as economic conditions normalize it is expected that interest rates will increase – increasing the cost of servicing a growing debt.

For someone who owes $250,000 and pays 2.50% (just slightly above prime) for a variable rate, just covering the interest each month costs $513. If rates increase as expected and move up to only 5.00%, the monthly interest cost jumps to $1,027. If people get spooked and jump to a fixed rate loan at that point, it would be at an even higher rate. Interest costs on that same debt at 7.50% each month jump to $1,541. Any payment to reduce the amount owing would be on top of these amounts.

As I’ve suggested before, the best use of this extraordinary period of low interest rates is to use it to pay more money on the principal owing, not to borrow more. If you do borrow more, do so only to acquire an asset that you either need to have or will appreciate in value – preferably both.

Borrowing money is a personal choice so the amount you owe is the amount you choose to owe. While credit granting organizations have a role to play in helping you manage how much you owe, in the end it is your responsibility.

If you find yourself having to borrow to meet your ongoing expenses, please seek assistance as soon as possible. See your banker or another Credit Counsellor who is capable of helping you work through the process of getting control of your finances. For those who are connected to the Internet, the Government of Canada – Financial Consumer Agency has a great website set up to get you started. Visit http://www.moneytool.ca to access a wide selection of free and very useful tools.

Keir Clark, is a senior wealth advisor, with Clark Wealth Management Group and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.