In the Pension and Wealth Research study by Statistics Canada, all forms of debt are on the rise by Canadians. Whether it is mortgages, lines of credit, car loans, or credit cards, Canadians now have a collective $760 billion dollars of debt, which is up almost 50% from 1999 when the last Pension and Wealth Research Study was done by Statistics Canada.
Today we live in a world where debt is so accessible. Just today I threw out another letter giving me a pre-approved credit card with a $25,000 limit. Every financial institution is eager to issue a loan or a credit card because it is a profitable business. With the rise in real estate across Canada, so many Canadians feel like they have hit financial windfalls and are either refinancing their homes or going out and buying bigger homes, not because they have more money but because it is easy to finance more with low interest rates. More and more people are keeping balances on their credit cards paying outrageous interest rates like 18% or more. You can also see debt on the rise in the financial arena where financial advisors and financial institutions are promoting the concept of leverage as a cornerstone strategy to building wealth. Debt is everywhere and the statistics are getting scary.
Why are consumers so eager to take on debt?
There are many theories around why Canadians are eager to take on debt but here are a few of the more common theories:
- Consumer Spending – We live in a consumer spending environment where consumers have more choice to spend than ever. Just look around this Christmas – it's so easy to spend money. We live in a world where not only is there a constant barrage of media messages enticing us to spend but it has become easier to spend money we don't have through credit cards and lines of credit
- Low interest rates – certainly the low interest rate environment has fueled consumption patterns. It has clearly made it easier to buy homes, cars and other consumer items. We can take on more debt without affecting our cashflow. At a 10% interest rate, you would pay $1000 of interest on a $10,000 debt. At 6%, you can borrow $16,667 and still pay the same amount of interest.
- Housing Prices – rising housing prices has increased Canadian Debt. In fact, 75% of the debt in Canada is attributed to mortgages. As Real Estate Prices rise, Canadians are forced to take on more debt to buy the same relative home from 5 years ago. At one time you could only buy a house if you had 10% for a down payment. Today, financial institutions will lend you 100% (sometimes more) towards the purchase of a home. All of this leads to why there is more debt.
Whatever the theories may be, debt is on the rise. On the other side, studies suggest that one of the biggest contributors to higher stress levels among Canadians is the stress of money. With the amount of debt Canadians are holding it is no surprise that Canadians are more stressed about money than ever. Maybe a solution to reduce stress is simply to reduce the amount of debt that we hold.
My father has always preached the importance of reducing debt and living within your means. At the age of 75, most Canadians of his generation were and continue to be savers. His generation was much better at minimizing debt as a priority. Savings rates in Canada show a clear trend in the deterioration of one of the key principles to building wealth. Canadians just are not saving money.
Statistics Canada reports that the savings rate of Canadian consumers peaked at 19.1% in 1982. Saving rates remained in the double digits between 1973 and 1993. Since that time, the savings rate of Canadians has steadily declined, falling to 4.2% from 1997 to 2003. Today, savings rates are negative which means people are spending more money than they save.
We need to learn from the generation of savers and start thinking about reducing our debts. We need to start living within our means and become a society that values savers over spenders. We need to start thinking like my father and his generation of elders. They will tell you that being debt free means you control your destiny. Make it a priority in the upcoming year to reduce debt. Reducing debt will help you put control into your financial affairs, reduce interest expenses and cashflow strain, and point you in the direction of financial freedom.