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Why High Debt Levels Are Troubling

Recent surveys, including a 2017 survey from the Canadian Payroll Association, show that many Canadians are living paycheque-to-paycheque. According to the Canadian Payroll Association survey, 47% of those surveyed say that they would have trouble meeting their financial obligations if their pay was delayed by even one week.

The same survey also found that 35% of people feel “overwhelmed” by their debt. High levels of debt can be very stressful and this stress can result in serious health issues.

In March, 2018, it was reported that the collective household debt of all Canadians reached $1.8 trillion in the fourth-quarter of 2017. This number excludes mortgage debt, and is an increase of 6% from a year earlier. The average Canadian owes $8,500 in consumer debt, excluding their mortgage.

The Royal Bank of Canada stated that it expects economic growth in Canada to slow in 2018. This is due to expected interest rate increases which, combined with high levels of debt, will lead to a decrease in consumer spending. Since many Canadians are very heavily in debt, an interest rate increase could make it very difficult for many people to repay their debts. This would mean that they would need to cut their spending to make ends meet.

In addition, the Bank for International Settlements (BIS) said that Canada’s credit-to-GDP gap and debt-service ratios have surpassed critical thresholds and are signalling red, which points to vulnerabilities. The BIS also said that Canada, along with Hong Kong and China, is one of the economies most at risk of a banking crisis.

All of these numbers add up to a potentially troubling situation.

There is only so much debt that the average person can afford to repay. Once a person’s financial obligations reach a certain point, it becomes nearly impossible to afford them.

Many also worry about the potential affect of provincial and federal debt levels. For instance, in Ontario, provincial debt is approaching $350 billion. This debt must eventually be repaid and one way that this can be done is through increasing taxes. However, since many Canadians are barely getting by financially, this approach may not be possible. Increased taxes would stress Canadians who are already struggling to get by. Another option to reduce the debt is to cut services or government programs. However, since these services and programs are used by many Canadians, they are difficult – and unpopular – to cut.

This helps explain why a recent Ipsos poll found that majority of Ontarians from all parties are worried about Ontario’s rising debt and deficit.

How to Manage Financial Commitments

One of the best ways that Canadians can prepare for potentially difficult financial situations (whether it be interest rate increases, tax increases, or more personal situations such as a job loss or injury) is to repay personal debt and avoid taking on new debt.

Once you get to a point where you are no longer living paycheque-to-paycheque, you can put some money aside each month for emergencies. An emergency fund is critical to staying out of financial trouble. It’s impossible to predict the future and unexpected costs will certainly come up. When they do, you are better able to weather the storm if you have some money saved for this explicit purpose.

To repay your debt, it’s important to have a budget and to stick to it. To create one, write down all of your financial commitments (rent/mortgage payments, debt repayment charges, utility costs, etc.) as well as your monthly spending (such as how much you spend on food, transportation, clothing, etc.). You then need to add these costs up and compare this number to how much you earn each month. If you are not able to afford all of your financial commitments on your current income, then you will likely need to make cuts.

If, despite making cuts to your budget, you are still struggling to meet your financial commitments, then you may wish to speak with a licensed financial professional about your situation. For instance, a Licensed Insolvency Trustee can review your finances and explain the options that are available to you. A Trustee will give you details on all the available options, not just those that he or she administers. This will help you make a wise choice for your financial future. Most Trustees offer an initial consultation at no charge.