Debt trap? Thats right? Households have fallen in a debt trap and are digging one hole to fill another. They use many credit cards. They pay minimum on each, and they dig a deeper hole monthly! On June 15 2009, the Bank of Canada said, “surging household debt is emerging as the greatest risk to Canada’s financial system.”
The Debt Trap is Self Imposed
According to Vanier Institute of the Family’s 2009 Report, issued February 2010, “from a household perspective, there will continue to be high unemployment for sometime, income growth will remain weak, and there is an urgent underlying need for many families to repair and/or strengthen their household balance sheets… For far too many, there is too little income, too much spending, too little saving and too much debt.”
In May 2010, a report titled “Where is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge” by the Certified General Accountants Association of Canada (CGA), stated, “the level of debt adjusted for inflation and population growth shows a continuous upward trend over the past two decades, as well as in 2008-2009. In fact, if household debt was to be evenly spread across all Canadians, each individual would hold some $41,740 in outstanding debt in 2009, an amount 2.5 times greater than in 1989 … Rising debt continues to be primarily caused by consumption motive rather than by asset accumulation.”
There is good news and bad news about the household debt trap. The good news is, it is accepted generally by policy makers that Canadians are carrying too much debt. The bad news is Canadians aren’t heeding warnings. Also, we do not hear much about the need for Canadians to start lifestyle changes to lower debt. Here are a few suggestions.
First, know your situation. Understand that to reduce debt, you must reduce spending. This could mean lowering living standards. Increasing income while in debt doesn’t address lifestyle issues. Usually it is a temporary fix.
Second, each household needs to work with a spending plan. Without such a plan, folks will spend funds they don’t have. And as the CGA report highlights, Canadians are taking on debt primarily for consumption items. Pay special attention to housing costs. If you might not be able to cope with at least a two percent point rise in mortgage rates, look at all options to deal effectively with housing in the near term, including selling and renting until finances are in order. Seek God’s guidance in all areas. It is fine to rent when you don’t have the capability to own … really; it is!
Third, folks should …
(a) work to repay credit card and other consumer debts, then
(b) start a Capital Fund, to pay for non-routine spending; in Canada, using the Tax Free Savings Account (TFSA) as the savings vehicle.
(c) after you establish the Capital Fund, start working on paying extra funds against your mortgage
(d) unless your employer contributes to your pension plan, defer setting aside funds for pensions until you repay your mortgage.
I believe we are at the brink of a personal financial crisis. Many folks will have to face consequences of buying unaffordable homes, and using seductive financing to buy consumer items! Still, it’s never too late to stop debt accumulation and start needed lifestyle changes!
ⓒ 2010 Michel A. Bell. For more Christian Financial Advice, visit Managing God’s Money