“All but the most sophisticated Canadian citizen will spend a life time paying off their debt.”
Is that true? If so why? Is debt a fact of financial life?
The comments from respondents were very instructive. However, the lack of response was even more eye opening. Only 8 people bothered to send an answer. So maybe debt isn’t a big deal. Let’s find out.
The word ‘sophisticated’ caught a few readers’ attention. They wanted to know what it meant. In the context of that quote it means knowledgeable. It does NOT mean rich or well off.
One person asked if debt included mortgage payments. Technically it does, but the more worrisome part of most peoples’ debt load is the debt on depreciating liabilities or non tangibles. Want two examples? Depreciating liability: car. Non tangible: Putting a weekend away or a meal out on your credit card and still paying for it a year later.
A very worrisome trend is that more than 100% of Canadians’ disposable income is going towards debt payments.(1) That means wage earners are paying off debt with money they don’t have. Is that sustainable?
One reader disagreed with the quote. She believes there are enough resources available to acquire the knowledge needed to manage debt wisely enough to have a debt freedom date in the foreseeable future.
More than me nattering at you readers these two clients’ responses worded the challenge better that I could:
Unless we Canadians become more knowledgeable about our money and not treat it as just something that is goes into a chequing or savings account, we will never be able to learn how to make it work for us. We need to put time and energy into learning, it is not something that comes naturally to us.
Most Canadians think they are surviving if they are not bankrupt, some believe they are doing ok if they make all their minimum payments, and some exceptionally well if they make a little headway on their debt. Unfortunately all of these can still have us paying the banks unless we wake up and start to play it smart.
The bottom Line is: Do more Canadians need to become more “sophisticated” about their finances specifically debt management?
Here are some observations that readers can reflect on:
41% of credit cardholders do not know what their balance is.(2)
Last year Visa sent out 5 billion credit card solicitations.(3)
Credit cards have been called the crack cocaine of the financial world.(4)
The interest Canadians paid on credit cards was $57.2 billion. That excludes lines of credit, car loans, and mortgages.(5)
Only a quarter of a percent increase in a credit card interest rate would mean cardholders would pay another $2.5 billion.(6)
Canada’s Big 5 banks’ profit last year was $12.6 billion. Of that 50% was attributed to service charges.(7)
By the way some of the banks claim they don’t have service charges anymore. What has happened is they are renaming it a delivery fee.
So it is obvious there is some serious money being made here at the expense of a lot of consumers. How? Because too many people don’t know what their balances are and are usually not aware when their interest rate increases.
How many of you remember what I wrote in a previous issue:
Poor people buy things, the middle class buy liabilities, and the investor buys assets.
The lending institutions rely on consumers buying many liabilities. And so far too many are doing just what they want.
So by now you should know me well enough to know that I always offer a tool or strategy to enable you to achieve your financial independence date.
The most important action consumers can take to thrive instead of survive is to find out how they spend their wages every month.
The idea here is to subtract all your obligations that are the SAME amount every month.
What is left is what you can spend with discretion. These expenses will be different every month. This category includes money spent on food, transportation, utilities, entertainment etc.
What are the two most important words in the last paragraph? They are discretion and etc. Why? The reason is that is where many Canadians trip up in their finances. They need to exercise discretion and examine the etceteras. While doing a budget can be helpful it is more important to find out where you are spending your money every month. That way you will know what should be left at the end of the month.
If this newsletter has upset, disturbed or made you angry that is a positive. Those emotions can be motivating. Please don’t be depressed. If you are talk to me! There is always a solution for every situation. I am sure every reader wants to keep more of the wages they worked hard to earn.
Few things in life are more liberating than paying off debts and having financial freedom.
So is the above comment true? I’ll leave you with one last statistic from a recent Royal Bank survey:
48% of Canadians surveyed do NOT believe entering retirement debt free is essential.
One reader wrote: I will be debt free by the end of 2006.
If this newsletter increases people’s resolve to be debt free then it was worth it.
About the energy saving tips:
Three of the more interesting energy saving tips from clients:
How to get better gas mileage: avoid aggressive driving. Speeding, fast acceleration, and hard braking wastes gas. Clear your car of extra weight, and remove roof racks or carriers if not used frequently. Keep current with car maintenance.
I will add changing routes that I drive frequently has also helped my little SUV to conserve gas.
Although not saving energy directly another interesting tip sent in was that water should be able to pass through your dryer filter. Apparently even if the filter is cleaned regularly and looks clean fabric softener buildup reduces its efficiency.
Another reader suggested to conserve energy move out to a log cabin the country.
Thank you to all who took the time to reply and send in tips. I always like to write my newsletters on readers’ questions and responses.