TORONTO – While the Canadian economy may have come out of the global financial crisis relatively well, experts say Canadian families are not faring as well as businesses.
On Monday, a poll released by CIBC showed that fewer Canadians are taking action to pay off their mortgage debt, “the largest debt most Canadians will take on in their lifetime,” said Barry Gollom, CIBC’s vice president of secured lending and product policy.
Last week, a survey of Canadians with kids showed that half feel that they are falling behind on their monthly expenses, or are just getting by without any money left over for savings.
Growing consumer debt, paying for post-secondary education and saving for retirement top the list of financial obligations facing Canadians families.
In some cases, our debt and lack of savings comes down to a lack of financial skills and a lack of clear financial goals, Scott Hannah told Global News.
Hannah is the CEO of the Credit Counselling Society (CCS), a non-profit organization that helps Canadians solve their debt problems and manage their money.
While a lack of financial skills contributes to growing debt loads, so too does embarrassment and fear, Hannah said. “I can’t tell you the percentage of clients that have that look on their faces and feel like they’re the only financial misfit.”
When you walk into a CCS office, one thing you’ll notice is a big container filled with cut-up credit cards. The point of the container? To show that you’re not alone – “there’s been a lot of people here before you,” said Hannah.
The good news – there are things you can do and skills you can learn to help take control of your personal finances.
Tips for paying off your debt, saving and teaching your kids about money
- Make a budget
- Pay off debt and save while you’re doing it
- Balance family fun with financial goals
- Involve your kids in the financial conversation
- Give kids an allowance and let them screw up
- Teenage kid? Make sure they have a job
- Teach kids how to use credit responsibly
- Re-think gift giving
Make a budget
The first step to getting your finances on track is to think of your family like a business, said Hannah. The first rule of business? “You can’t spend more than comes into the household,” he said. So you need to have a budget.
“A lot of people think as a budget as a four-letter word. And we do too. It’s called a plan,” he said.
He stresses the importance of adopting a long-term financial strategy (rather than planning from pay cheque to pay cheque) and creating meaningful goals that are really clear.
“When people often talk about their financial goals it’s along the lines of ‘I want to earn more money, own a house and get out of debt.’ “But these aren’t goals, these are hopes,” said Hannah.
If your hope is to get out of debt, your goal could be paying off your credit card debt within the next three months, for example. With that goal in mind you can budget how much money from each pay cheque needs to go toward credit card repayment. “You need to have to something that’s really clear,” said Hannah.
Paying off your debt and saving for the future
The CCS recommends Canadians take stock of their financial situation – write down what is owed, who it is owed to, the payments required, outstanding balances and interest rates.
Once you have a picture of your assets and liabilities, make an accurate list of the money coming into your household and where it’s going. Track what you’re spending on annual expenditures: clothing, vacations, property taxes, car repairs and so on.
Once you have your annual expenditures, divide that by 12 to get your monthly expenditures. Weigh that number against your income and debts and see if you’re in a positive or negative financial situation.
If your budget isn’t balanced, you need to make some changes.
Try giving yourself an allowance on discretionary spending. For example, give yourself $25 in cash at the beginning of the week to pay for things like lunches and coffees. If your allowance is gone by Wednesday, then brown-bag it for the rest of the week.
Once your budget is balanced start looking for the best way to pay off your debt, said Hannah.
First step, put your credit cards away and live off a cash diet. If you’re paying off multiple credit cards, Hannah recommends paying off the smallest one first and then celebrate by cutting it up. Then move on to the next.
“It’s really important for people to monitor their success and see they’re making progress,” he said.
You can also look into getting a consolidated loan, which allows you to combine multiple debts and payments into one regular payment.
Hannah isn’t an advocate of lines of credit, because they don’t have an end date. A loan, on the other hand, will allow you to see how much you need to pay each month, and when the debt will be paid off entirely.
Hannah said everyone should work toward having six months of emergency savings on hand.
“You absolutely have to have a component in your budget for emergency savings. In order to get out of debt you need to get into a habit of saving,” he said.
He recommends putting new-found money (such as bonuses and income tax returns) into debt repayment and emergency savings, rather than factoring that money into your budget.
Balance family fun with financial goals
“We’ve become really comfortable with debt,” said Hannah, always wanting the latest and greatest of everything. And if we don’t have the cash to pay for something, a quick swipe of the credit card, and it’s ours.
Complicating the situation for families is that young kids are bombarded with marketing information from a young age, they’re already brand loyal and that puts a lot of pressure on parents’ financial goals.
“You become Mr. and Mrs. No,” said Hannah. Constantly telling the kids, “No we can’t do this.”
Look at the families who have fun together, said Hannah. They don’t have the best car on the block, but they have a car. They don’t go to the most expensive restaurants in town every week, but they’ll go out as a family every once in a while for a fun (cheaper) meal.
“Balance fun and enjoyment with reaching your goals,” said Hannah.
Involve your kids in the financial conversation
In the family business, you involve your employees. So Hannah said to involve kids in goal-setting. Explain to them (in an age-appropriate way) what your financial goals are, how you’re going to reach them, and why.
“Include the why, so when it comes to making choices you can clearly show how certain things (like family trips) might impact your goals.”
Give kids an allowance and let them screw up
One tip for parents wanting to teach their kids financial skills is to give them an allowance, with some guidelines.
Let them know that if they want to purchase an expensive pair of shoes, for example, they’ll have to stash away a portion of their allowance every week to save up for them.
Hannah said that parents need to let their kids make mistakes with their allowance so they’ll learn about money management. If your kid ignores your advice and blows his entire allowance on a pair of sneakers, don’t give him more money.
“Helicopter parents” – who hover and circle around and around their children, never letting them make a mistake – need to help their kids become financially smart, said Hannah. Otherwise, “they’ll never get there.”
Where a small mistake as a child might not seem like a big deal, the behaviour could develop into a habit and result in a $20,000 mistake when they’re older.
Have a teenage kid? Make sure they have a job
If your kid is approaching 15 or 16, it’s time to talk to them about getting a part-time job.
“Kids who get part-time jobs at an earlier stage tend to be more successful than those who don’t,” said Hannah.
Recent research from the University of British Columbia showed that teenagers who work part time have a “competitive advantage” later in life.
The study said kids who work in their teenage years learn about the working world and how to juggle their priorities. They also, said Hannah, learn about the value of money.
Hannah suggests that parents phrase conversations around spending money in terms of working hours. For example, if they want to buy a new pair of jeans, explain to them how many hours they will need to work at their job in order to pay for them.
“These sorts of things help kids understand the value of a dollar,” he said.
When it comes to paying for post-secondary education, get kids involved.
Talk to them from a young age about going to school, about the fact that it costs money. Teach them about saving extra money from their part-time jobs for education savings.
“Kids need to have skin in the game when they go to school,” said Hannah. If a teen is using their hard-earned money to pay for tuition and books, they may be more likely to take school seriously and put more effort into it.
Another tip is for parents to, if possible, put money aside in an RESP for their children, but get the kids to save up to pay for the courses themselves. Unused money in the RESP can later be transferred into a high-interest savings account, so when the child graduates they have savings, rather than costly student debt.(For more practical money tips for post-secondary students, click here.)
Teach kids how to use credit responsibly
All too often people use credit cards for things that they want, not that they need.
But, said Hannah, if you use credit like a car without a drivers’ license, eventually there’s going to be an accident.
Parents need to help their children learn to use credit responsibly. Teach them about the difference between paying off an entire credit card bill versus only paying off the minimum payment. Show them how long it will take to pay off a debt if only the minimum payment is being met.
Also, if your child makes a mistake with their credit card, don’t cover the costs for them. Rather, talk to them about what they should have done, so they don’t make the same mistake down the road.
“It’s an education process,” said Hannah, “and the most effective learning comes in the household.”
Re-think gift giving
Talk to family members (like grandparents who love to spoil the kids around gift-giving occasions) to opt for only small gifts for the kids plus a contribution to the child’s RESP or a bond.
If a child received a $100 bond every birthday rather than a toy or gadget, by the time they reach their college years, they have money at hand that they can cash into an RESP or high-interest savings account.