With levels continuing to rise, debt is becoming more of a financial problem for Canadians, who currently have an unprecedented debt-to-income ratio of more than 140 per cent.
Despite this reality, a recent report from Investors Group indicates — rather incredulously — that the majority of Canadians who are in debt believe it will have a positive impact on their life in the future. Debt is becoming a fact of life in today’s world.
“The reality is that almost everyone has consumer debt,” says Jack Courtney, assistant vice president of advanced financial planning with Investors Group.
“But accumulating debt with purpose and putting thought into how debt will be repaid is very different than spending beyond one’s means and without foresight.”
It’s interesting to look at where Canadians are incurring debt.
Of the 75 per cent who said they are in debt, 54 per cent attributed it to purchasing property, 37 per cent to home renovations, 28 per cent to financial investments and 18 per cent to skills upgrading and going back to school.
Sixty-six per cent of Canadians incur debt for day-to-day living expenses like food and gasoline, 30 per cent for travel and vacation costs, 23 per cent for entertainment and recreation, 18 per cent for costs to support children or parents, and 17 per cent for impulse purchases.
On the positive side of the debt equation, Canadians are trying to cope with it.
Seventy-three per cent say they have some idea about how they will pay what they owe: 35 per cent plan to curb their spending, 14 per cent are considering delaying retirement to pay it down and 13 per cent plan to work at more than one job to get more money.
“The best way to deal with debt is to step back and take a look at what type of debt you have, how you use it and choose the best course of action,” said Aurele Courcelles, director of tax and estate planning at Investors Group.
Not all debt is the same. Financial experts like to differentiate between good and bad debt.
Good debt includes anything that is too expensive to pay cash for but is something that you need or might be considered a good investment, such as a house, which usually rises in value over time.
Bad debt is any form of debt with a high interest rate for things you don’t really need or can’t afford, such as charging an expensive vacation on a credit card.
The worst form of bad debt is credit card debt because it carries the highest interest rate. It becomes particularly bad when consumers are unable to cover the monthly card payments and continue to add to the balance.
If you can’t solve your debt problem by budgeting, you may need a debt management plan (DMP).
A DMP is designed for people who can afford to repay their debt but need help negotiating with creditors and time to get back on top of their financial situation. It’s a voluntary agreement between you and your creditors arranged by a credit counselling agency.
The agency pools your unsecured debt together so that you make a single monthly payment to the agency, which then divides your payment among your creditors, with the largest creditors getting a bigger share of the payment.
A DMP gives you a single monthly payment to make. Then it reduces and sometimes can even eliminate interest charges and relieve you from receiving nagging calls from collection agents.
In most cases, creditors will agree to waive most or all of the interest, so all payments go toward paying off principal, which reduces the debt faster.
Depending on individual circumstances, a DMP may be a great way for many Canadians to get relief from the increasing level of debt they are incurring.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.