Are high debt levels really a problem?
Debt is in the news again. That’s not new news and neither is the message that Canadian have high debt levels that continue to increase steadily to new record levels with every new study or report. The latest study by Equifax Canada has Canadian Consumers pegged at 1.5 Trillion dollars of consumer debt (which does not include mortgages). A separate report by the Royal Bank of Canada puts total debt including mortgages at over $1.8 Trillion dollars as of October 2014.
Recently, Global News Edmonton asked me to comment on the staggering debt data in Canada. I thought I would share more of my thoughts on this topic.
Are high debt levels a problem?
The simple answer is yes. Common sense says you should live within your means or spend less than you earn. There was a time when the debt was not as available as it is today and you had no choice but to save before you could spend. I think of the days when I was young and I watched my dad pay for groceries with cash because grocery stores did not accept credit cards. In those days, you delayed gratification until you had the money. Today debt has us living a different life. We now delay the consequence. With credit cards, lines of credit, financing and other debt options, we no longer have to delay gratification we simply delay the consequence. The consequence is that we have to pay it off which affects our future cash flow and finances.
For some, Canadian high debt levels are not a problem because they are debt-free. For others, debt might be manageable. The problem I see is the trend. Rising debt levels might be OK in this current environment when interest rates are low, the economy is good, and real estate prices are increasing. But what if some of these ideal conditions start to deteriorate. That’s when significant debt problems may appear. There’s an old saying that goes something like this “It’s not how you do in good times that counts. It’s how you weather through the bad times that really sets people apart.”
Related article: How to Stress test your debt?
- Cars – leasing has changed how car purchases influence our decisions. Most people accept that they will always have a car payment through leasing or financing for 85 or 96 months.
- Retail – Every major retailer in Canada offers credit cards with incentives attached to them. Walmart, Canadian Tire, Home Depot, The Bay, Shoppers Drug Mart, etc.
- Retirement – more and more Canadians are retiring with debt instead of the goal of retiring debt-free.
- Lines of Credit – Banks give these things out pretty freely. Is it because it helps Canadians with greater security and freedom or is it because banks profit greatly from the debt product business?
Good debt and bad debt
We’ve all heard that debt can be a problem and debt can not only be bad but devastating to finances but is there such a thing as good debt?
Related article: Good Debt and Bad Debt
There’s no question that debt can be used effectively and productively at times but I go back to a lesson my dad taught me years ago “The best debt is to have no debt”. That’s when you have the ultimate financial peace of mind and greater financial security. If the days ever come where interest rates rise or the economy is not so prosperous or employment levels change or real estate prices correct, it will be those people with no debt or little debt that wether that storm the best. Those with too much debt will be the ones that will find the greatest challenges. Who would you rather be?
Related article: 5 Simple Steps to get out of debt
Are high debt levels really a problem? YES and NO
Probably for the majority of people who borrow to finance their life style and hope to pay it off over time then it is a big YES.
Some others have borrowed to invest and then it becomes an optics question along with whether or not they can afford to pay off the debt. This is my case. I run a HELOC for investment purposes. My house is paid off (except for HELOC), my car is paid off, my kids are working, The investments cover the cost of the HELOC (interest charges – 3%) and also pay down some of the principle every month. In effect it is paying for itself. The principle is more than sufficient that if I were to liquidate all holdings I would have a nice little pile in the bank of which the CRA would want a cut. So, in my case, I just may enter retirement with over #100K in debt.
SO all debt is not the same. I would even bet that over 95% of people who have ammassed some dinaro in the bank have at some time gone in debt to – finance a business startup, buy an appartment block, invest in something.
It is possible to squirrel money away and invest it wisely and come out on top. But it may take more time unless you are a stock picking genius or just plain lucky.
There’s something wrong with the debt numbers. How could non-mortgage debt be 5 times as big as mortgage debt? The Equifax release on Dec. 3 says total consumer debt is $1.448 trillion, but then says that the average Canadian’s non-mortgage debt is $20,891. If the first figure is non-mortgage debt as well, this implies there are 69 million Canadians, which is nonsense. So, I’m thinking the $1.448 trillion includes mortgages. But then what is the $1.8 trillion figure?
Every study says slightly different things. This information was pulled from a Globe and Mail article
Slight differences can be expected, but there’s nothing slight in this case. The non-mortgage debt figure seems off by about a trillion dollars (or about a factor of 3). I saw that the G&M numbers were nonsense as well.