Surprised? I wouldn’t be.
According to the last calculation from Statistics Canada, the average household owes 165 per cent more than it earns in annual disposable income, meaning an average family with $100,000 annual disposable income owes $165,000.
WE OWE 165%!!?
Even if most of it is in mortgage debt, it is a huge honking amount of money to owe and to have no way of being able to pay it off.
Things that could and probably will go wrong for some Canadians:
- Interest rates on mortgages start rising and people can’t make the extra payments
- Someone loses a job
- Someone gets hurt or sick and can’t work, and ends up on half their pay (disability)
Think about it, that’s the average.
There are people like me out there who have $0 in debt, so someone is owing way more than 165% of what they earn in annual disposable income.
I can think of at least ONE family who is in trouble like this.
They’re on the brink of getting their house re-possessed because they got so used to the husband making $80,000 a year, that they never thought he would lose his job and didn’t save a damn penny.
They sure tithed a lot though, about 15% of their income to those ‘less fortunate’ at that time.
Now she’s begging the utilities company to not cut their hydro off, and wondering if she should continue even buying milk for the kids because it’s costing them so much money.
Don’t be that woman. Don’t reach that point.
ISN’T BORROWING (IF YOU CAN AFFORD IT) OKAY?
It’s one thing to borrow money from the bank, invest it, and take advantage of low interest rates by leveraging your money*.
It’s entirely another thing to borrow money from the bank, spend it frivolously, and to not be able to really pay it back if one little or big hiccup happens in your life.
*Leveraging is essentially when you make more money than what you pay in interest rates to the bank.
Borrow if you can afford it.
If you’re borrowing to pay for some fancy vacation you think you deserve, then you can’t afford it.
WHAT CAN SOMEONE DO?
- Spend less than what you earn, and learn how to do it by budgeting and tracking your expenses
- Make sure that if you own a house and a mortgage, you are able to weather higher interest rates
- Be prepared for any sudden drop in income and have an emergency financial plan ready
- Pay down consumer debt that is probably choking your finances at 20%+ interest rates
- Don’t buy more house than you can afford — 2X your income should be the max you can take on
WHAT IS AN EMERGENCY FINANCIAL PLAN?
If you have been budgeting and tracking your expenses, you will know exactly where your unnecessary expenses are that can get the axe.
Examples of unnecessary things in a budget that you can eliminate completely or at least REDUCE in a pinch:
- Cable TV
- Cellphone plan**
- Eating Out
- Coffees Outside
- New Clothing — if it’s necessary, buy secondhand
You get the idea.
Anything beyond a roof over your head, basic food in your mouth and basic clothing (you need a basic, perhaps secondhand coat in winter, of course), is unnecessary in times of a financial crisis.
**Even if you have to pay $300 to get out of the plan, do the math — $300 now or $2400 over 3 years? Read: How I made the decision to get rid of my rather useless smartphone
You can go even farther than that and start chopping things like your car over the long-term and take the bus instead.
You’d get rid of a good chunk of the car loan (even if it’s at a loss), but you’d save on parking, gas and car insurance.
These are all things you should consider in case something bad happens. I’m not advocating that you live like that now, but you have to be mentally prepared to do what it takes.