As the highly anticipated announcement of the federal budget approaches, a new report seeks to remind Canadians of the urgency of tackling debt, as well as suggest different ways to address it.
According to the 2019 Household Debt Survey, a Leger poll of over 1,500 Canadians conducted for the Financial Planning Standards Council (FPSC) and Credit Canada, one out of every five Canadians (19%) say they will need to liquidate assets to pay down or pay off their debt.
The need to resort to those kinds of measures — including tapping the cash from their RRSPs, selling a vehicle, and getting a second mortgage — was found to be more prevalent among men than women (24% vs. 14%). The same was true between those with children under 18 and those without such dependents (23% vs. 16%).
Focusing on indebted Canadians, the survey found two thirds are expecting to take on new forms of debt this year. Within that group, those below 55 years of age were considerably more likely to anticipate new forms of debt compared to older respondents (67% vs. 50%).
The new forms of debt that Canadian borrowers said they were anticipating most include new/increased credit card balance (23%), line of credit (15%), vehicle loan or lease (13%), and mortgage (12%). Less common answers were personal loans (8%), student loans (7%), and payday loans (3%).
“With federal Finance Minister, Bill Morneau set to release the federal budget on March 19, Canada's national debt hovers above $691 billion – that's nearly $18,700 per Canadian according to Canada's national debt clock,” the FPSC noted. It added that Canadians are operating on a tight budgetary leash, with nearly half being within $200 of not being able to pay their bills.
To help people gain control of their budgets and debt, the FPSC encouraged them to take on several psychological and behaviour-based exercises. One recommendation by author and financial educator Kelley Keehn is to write down every dollar expense over a thirty-day period, which is expected to spark awareness by the end of the first week.
“There are several ways to create awareness, such as paying only with cash for a month which accesses a different part of the brain that is associated with loss aversion,” said Keehn, who is also FPSC’s official Consumer Advocate. “A good person to take this journey with is a CFP® professional who can help create a holistic financial plan.”
Credit Canada also offers a Snowball vs. Avalanche Debt Calculator, which is meant to help Canadians with debt determine the best repayment option for them. The snowball method involves paying the smallest debt first regardless of interest rate, while the avalanche method focuses on the highest-interest debt first. According to Credit Canada, the effectiveness of a method often depends on behavioural, emotional, cultural, and social factors.
“Budgeting and debt are inexorably linked,” said Laurie Campbell, CEO of Credit Canada. “There's no better time than 'budget month' for people to take a step back and holistically review their finances, housing costs and expenses – essentially, how much money is coming in versus how much is going out.”
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