Cut debt, advises personal finance expert

Canadians are carrying “extremely high” levels of debt and a good New Year’s resolution would be to reduce it, says personal finance expert Jean Freed.

The average debt-to-disposable income is 165 per cent, according to government statistics. That is, if a Canadian has $1,000 of disposable income, they likely have $1,650 of debt. There are several reasons for that, says Freed.

Blames spending, real estate prices

“One is, in general, we spend too much…(and) one of the main reasons is that Canada’s had very rapidly rising real estate prices.” She says about 60 per cent of total consumer debt is in mortgages and another 40 per cent is other consumer debt.

“I think the consequences are going to become clear in everyone’s mind when interest rates start to go up,” says Freed. And she says they will. “I think that when interest rates start to go up, Canadians with their very, very, very large mortgages are going to be sorry.”

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Time to sell the house?

If people’s houses are worth more than what they bought them for, Freed suggests it might be a good time to sell, downsize, or rent accommodation and see whether what she calls a housing bubble bursts.

Meantime, write down what you own and what you owe, and make a budget, counsels Freed. She says people should look at what they spend and make sure they get the best value, that what they spend makes them happy.

Goals can help

Having a goal can help. She notes that if a person saves $100 a month over a working period of 40 years, with average returns on investment they would have half-a-million at the end. That can motivate a person to save, rather than go into debt.

Borrowing to pay debts ‘frightening, insidious’

At all costs, people should avoid situations where they have to borrow, to pay debts, and Freed says Canadians are getting close to that point. “It’s frightening and it’s insidious. It keeps happening. It encourages, it almost obliges people to run up more and more debt.”