How can Canadians achieve financial wellness?

With science-based tools, new research suggests roadmap to recovery for financially stressed Canadians

How can Canadians achieve financial wellness?

The first day of the new year, for most people, comes with renewed aspirations. But with Blue Monday at its heels, many Canadians feel the pangs of financial stress. While financial distress may seem inevitable, preliminary findings from Financial Wellness Lab of Canada at Western University show that there is hope amidst an economic slump.

According to the report entitled, Financial Wellness Lab: State of the Nation December 2021, 16.1% of Canadians who were classified as financially stressed in 2020 were able to transition into the financially comfortable category within the relatively short time frame of one year.

“Up until now, our understanding of financial wellness has looked at specific aspects of the topics," said Western University’s Dean of Science Matt Davison. "At the Financial Wellness Lab of Canada, we are combining leading analytics tools and methodology, a multi-disciplinary approach and deep data sets furnished by industry partners to draw connections between the research already done and articulate a road map towards financial wellness – including identification of factors that can either slow or accelerate one's journey.”

The report defines three categories of financial well-being that Canadians generally fall into: financially comfortable, financially coping, and financially stressed.

“Where one falls on this spectrum depends on a variety of factors, but savings habits, spending and debt seem to be especially predictive,” said Adam Metzler, Associate Professor at Laurier University.

While each group is different, the comfortable and coping categories share more common characteristics. The gap between coping and stressed categories is 6.5 times larger than the gap between comfortable and coping, making it harder to make changes when households are in a financially tight state. And while the research shows making more money can help, it doesn't necessarily correlate with improved financial well-being.

“Because savings, spending and debt are so interconnected, it may be impossible for us to fully understand financial wellness by studying them in isolation,” Metzler said. “Improving these habits, and moving to a more ‘comfortable’ cluster, is far from simple.”

Metzler noted that financial wellness can be impacted by external factors like housing cost, which can throw Canadians’ financial well-being out of balance. This is especially true given the current real estate boom, where so many people are taking advantage of low interest rates and the ability to buy remotely.

According to the research, 58% of the comfortable group spend less than 30% of their monthly income on housing. On the other hand, 66% of stressed clusters spend more than 40% of their monthly income on housing. Based on the mortgage approval threshold set by Canada Mortgage and Housing Corporation (CMHC), homeowners must spend no more than39% of their monthly income on housing costs.

Based on recent data, the lab has also found that affordable housing and associated debt are of utmost concern for Canadian households. Even within the comfortable category, 29% worry about debt burden and 23% spend more on housing than the 39% CMHC recommended threshold. These data points show how the cost of housing is hitting so many households’ finances, and point to a risk of rate hikes adding significant financial difficulty to those who have borrowed.