WATCH ABOVE: The six biggest money mistakes Canadians make – are you guilty of them? Global News’ Heather Loney reports.
TORONTO – When it comes to debt and spending, there are mistakes and then there are Mistakes. Small luxury purchases won’t necessarily derail your long-term financial goals, but consistently living beyond your means, amassing consumer and credit card debt, and not saving for retirement could cripple someone for years to come.
This year, the debt-to-income ratio in Canada clocked in at 1.63. Meaning for every $1 earned, Canadians owed banks, credit-card companies, auto dealerships and other lenders $1.63 in debt.
In some ways, the recession was almost too short, said Scott Hannah, CEO of the Credit Counselling Society (CCS), “because it didn’t really change our behaviours.”
During the recession, the amount of debt Americans were carrying was at 167 per cent – today, said Hannah, that number is down to 140 per cent.
“We’ve gone the opposite way,” said Hannah. “We’re within a few percentage points of what the U.S. was at during the collapse.”
A recent survey from the CCS showed that while the majority of Canadians (66 per cent) consider themselves highly financially literate, many continue to make financial mistakes.
Spending more than you make, amassing consumer debt
Canadians have become increasingly comfortable with debt. In some cases, this is out of necessity – once the bills are paid, if there is nothing left from a pay cheque, groceries and other necessities get charged to a credit card.
But in other cases, consumers are spending more than they make chasing the desire to have the latest and greatest of everything.
“Living beyond our means is a one-way street to out-of-control debt,” said Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada. “If you’re spending more than you earn, that means you’re leaning on credit and the interest charges that come with it.”
In a recent survey for Consolidated Credit, 35 per cent of Canadians said their largest source of consumer debt was impulse shopping.
Many of those surveyed said they had hit rock bottom when they weren’t able to make their mortgage or rent payments. “You shouldn’t have to hit rock-bottom before you decide to make a change,” said Schwartz.
The majority of those surveyed (71 per cent), said that learning to live within their means was the most valuable lesson they have learned.
… and carrying that balance on your credit cards
The CCS survey found that 64 per cent of Canadians who frequently carry credit card balances claim to be highly financially literate. “It doesn’t make any sense,” said Hannah.
Consolidated Credit stresses the importance of paying more than the minimum payments on your credit card bills. “Paying the minimum will prolong your pay period and add interest to the cost of your purchase,” the organization said.
If you have multiple credit card debts, start by paying off the card with the highest interest rate (or try these strategies).
Buying too much car
Hannah said the amount of auto loans doled out is growing faster than any other type of loan in Canada because of new financing models.
Ten years ago, car loans typically maxed out at four years. “Then they crept up to five years,” said Hannah. Today, it’s pretty common to see seven- and eight-year car loans. And this is creating liability for consumers.
“They get a brand new car with an eight-year loan, trade in that car after four years, so the loan gets rolled into a new one — and now the loan is worth substantially more than the car itself,” he said.
Often consumers are motivated by the desire to own a brand new, shiny car, like the one in their neighbour’s driveway. But, “all of those nice cars you see, most people don’t own them,” said Hannah. “The bank does.”
Before taking on a car loan, experts suggest you sit down and take a close look at your expenses — see how much you can actually afford, including the cost of gas, loan payments, insurance and maintenance.
Hannah said the sweet spot for buying a car is when it’s four years old and sell it before it is 10 years old. If you’re buying a brand new car, you would need to keep it for around 10 years to make up for how dramatically it will depreciate in value.
Buying too much house
Whereas older generations managed with a single-car garage and two bathrooms, buyers today are lured by the two-car garage and three+ bathroom home for their family.
The difference, said Hannah, is that the older generations were able to pay their mortgages off. “Now people are retiring still holding mortgage debt,” he said.
“It’s common practice now that home purchasers ask ‘how much can I get’ as opposed to ‘how much can I manage,” said Hannah.
Meanwhile, the mortgage lender is asking, ‘how much money can we lend this person without taking on risk?’ Which doesn’t mean the borrower can actually manage that large of a mortgage.
If you’re thinking of buying a home, Hannah recommends doing a six-month trial period first. Determine how much the mortgage payment would be, add in other costs such as taxes and maintenance. If the extra costs are $800 a month, for example, try living for six months taking that $800 out of your pay to see if you can manage. You might find that you can’t — you can’t put money into your savings, into your debt repayments and into other things like travel plans or gifts.
Not having a budget or debt game plan
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.
According to Consolidated Credit, the average Canadian family owes an average of $20,759 in debt – without factoring in mortgage debt.
Consolidated Credit recommends collecting three months worth of pay statements, credit card bills, bank statements and utility bills. Don’t forget to add in other expenses such as gasoline, groceries and items you paid cash for.
Look at the numbers and see if you are in a spending deficit or surplus.
“Budgets shouldn’t be seen as restrictive,” said Schwartz. “They can be liberating – they put you in control of your finances so you’ll never have to worry about hitting rock bottom.”
Not saving for retirement
A recent poll from BMO Nesbitt Burns found that Canadians between the ages of 45 and 64 are falling behind on their savings plans. The average amount those polled want to have saved for retirement is $818,000 — but the amount they had actually saved was just $258,000.
One of the major reasons why Canadians say they aren’t saving for retirement is because they simply can’t afford it. Numerous surveys from Canada’s big banks show that Canadians aren’t making RRSP contributions because of car payments and debt repayment.
Experts recommend setting up automatic withdrawal plans, so retirement savings automatically come off your pay cheque on a regular basis.
An annual RRSP contribution of $2,000 would mean saving $167 a month — or less than $6 a day.
Hannah also recommends taking advantage of free money when you can, such as RRSP matching programs at your place of employment.
With a file from Global News’ Jamie Sturgeon and The Canadian Press