Over half of Canadians are walking a financial tightrope, one survey showed last month. With $200 or less to spare every month, they’re barely able to make ends meet. One little push, and they might lose their balance.
That small jolt could be coming later this year. The Bank of Canada (BoC) signalled this week that it is thinking about raising interest rates from historic lows, something economists believe could happen before the end of the year.
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Though rates will likely climb slowly and gradually, even a small uptick in debt costs may prove unsustainable for many Canadian households. A one percentage point increase in interest rates would likely result in $130 a month more in debt repayments on average for a Canadian household with $80,000 in income, according to Global News calculations based on a recent RBC report.
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That’s going to turn up the pressure on Canadians, who already feel stressed about their finances and debt loads. One in three said they worry about credit card debt and paying bills on time, according to a 2015 Global News/Ipsos Reid poll.
Families with high levels of debt often live with chronic stress, which can have dangerous physiological effects, ranging from heart disease to early onset of dementia and Alzheimer’s, said Mark Henick, national director of Strategic Initiatives for the Canadian Mental Health Association. Debt is also associated with severe anxiety and depression, a number of health studies show.
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If interest rates start rising, things could get worse before they get better.
The rational response to higher debt repayments would be to cut your spending, said Oren Amitay, a registered psychologist and lecturer at Ryerson University in Toronto. But that’s not how many troubled borrowers will react.
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Amitay expects many Canadians will persist in their current spending habits despite feelings of growing anxiety. Over time, the coping mechanism that often sets in is simply denial. Lifestyle changes are hard, so debtors try alternate routes to suppress the stress, such as ignoring overdue bills or coming up with “weak excuses” to rationalize mounting liabilities and dwindling savings accounts.
So how does one kick the debt habit?
From a psychological perspective, there are at least two ways to go about it, according to Amitay: Creating healthy habits and eliminating “upward social comparisons,” otherwise known as the pressure to keep up with the Joneses. The two strategies go hand-in-hand.
Creating healthy habits:
The approach here is the same one you’d use for any type of behaviour modification, such as dieting, noted Amitay. Here are the key steps:
1. Come up with a plan
First, figure out where you need to be and map out your future so you can get there. In financial terms, that means drawing up a budget, either on your own or with the help of a financial adviser.
However, it’s important to remember that “any long-term goals have to be flexible,” said Amitay.
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2. Focus on short-term goals
Having an overarching, long-term target is great but focusing on that can make you feel overwhelmed and ultimately prove counterproductive. Contemplating the enormity of your debt, for example, can be “very psychologically disempowering,” said Amitay, who often sees this with millennials who feel crushed by student debt.
The key is to take it step by step. Skipping a pricey latte in favour of a thermos of home-made coffee is a good example of an easily attainable short-term goal. Stick to it, and you’ll gradually make that into a habit.
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3. Track your everyday successes
Just as important is keeping tabs on how much of a difference those small, daily behavioural changes are making, said Amitay.
Giving up on your $4 morning coffee Monday through Friday works out to $64 of savings per months, minus the cost of your home-brew. If you’re among the Canadians who have only $200 in their pocket at the end of every month, even $50 more is a 25 per cent boost.
Over the course of a year, your new coffee habit would only save you $600 or so, but that’s not the right way to think about it, according to Amitay. Instead, envision how much more you’d be saving if you were to adopt several of those small behavioural changes.
Start packing your lunches. Make it a rule to never use cabs or Uber. Eliminate or scale back your Saturday night out. Track those changes for a month or two and you’ll get the motivation to keep going.
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Getting the Joneses out of your head
Upward social comparisons are often what drives you to spend what you don’t have, said Amitay. If your friends or neighbours get a hot new ride or a marble kitchen counter, you feel compelled to do the same — or inadequate for not being able to keep up. Social comparisons, in other words, are a major source of financial temptation. And in a country where debt fuels consumption, it seems like everywhere you go, you see people driving new cars, turning the key into their brand new homes, or whipping out the latest smartphone. It’s like living in a cupcake shop when you’re trying to eat less.
Here’s how to combat that psychological warfare on your wallet:
1. Know that by comparing yourself to others you are harming yourself. Instead of focusing on what others are doing, think about what makes you happy, said Amitay. In all likelihood, it has nothing to do with a new lawnmower or a $3,000 barbecue.
2. Compare yourself to yourself. So your tiny car looks sad parked right beside your neighbour’s brand new SUV. But did you manage to beef up your savings account over the last six months by repairing your car instead of trading it in for a brand new one? You can ride your clunker with pride.
3. Remember that you have no idea what others are really up to. Not only do you not know whether the Joneses are any happier for their many extravagant expenses, you also, likely, have no idea what their bank accounts looks like. Flashy purchases aren’t necessarily an indication of higher income, especially in a country, like ours, overrun by debt.
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