Posted Thursday March 14, 2019

Building Equity

One-in-five Canadians with debt will need to liquidate assets to pay it down in 2019

With the federal budget looming, households are encouraged to address budgeting and debt

One-in-five Canadians with debt say they will need to liquidate assets (e.g. cash in their RRSPs, get a second mortgage, sell a vehicle, etc.) to help pay off (or pay down) their debt in 2019. The need to liquidate is reported as significantly higher among males (24%) vs. females (14%) and those with children under 18 (23%) vs. without children (16%).

The 2019 Household Debt Survey, a Leger poll of 1,515 Canadians, was conducted for non-profit organizations Financial Planning Standards Council (FPSC) and Credit Canada as part of their series to uncover financial concerns that confront Canadians on a daily basis, such as budgeting, bill payments, debt, cost of living and job security.

New forms of debt

The survey also found that almost two-thirds of Canadians with debt (62%) anticipate taking on new forms of debt in 2019. Within this group, those under 55 years of age are significantly more likely to anticipate new forms of debt this year (67%) compared to those who are 55 and older (50%). Below are the anticipated new forms of debt:

• New/increased credit card balance (23%)
• New/increased line of credit (15%)
• New/increased vehicle loan or lease (13%)
• New/increased mortgage (12%)

As budget looms, a reminder for households to tackle debt

With federal Finance Minister, Bill Morneau set to release the federal budget on March 19, Canada's national debt hovers above $691 billion – that's nearly $18,700 per Canadian according to Canada's national debt clock. Much like all levels of government, Canadian households are also awash in debt. In fact, almost half of Canadians are within $200 of not being able to pay their bills.

The federal budget release is ideal timing to increase Canadians' awareness toward household budgeting and debt. FPSC and Credit Canada recommend a few exercises based on psychology and behaviour for Canadians looking to gain clarity around topics of budgeting and debt.

Kelley Keehn's 30-Day Anti-Budget – an exercise in awareness and behavioural change

Each year Kelley Keehn, author, educator and Consumer Advocate for FPSC encourages her readers, family and friends to account for every single dollar spent in a 30-day period. She urges them not to do anything different, just write down every expenditure. Awareness kicks in by the end of week one and many people effortlessly cut back on purchases.

"Many Canadians lack awareness of their spending habits and patterns," said Kelley Keehn. "There are several ways to create awareness, such as paying only with cash for a month which accesses a different part of the brain that is associated with loss aversion. A good person to take this journey with is a CFP® professional who can help create a holistic financial plan."

The psychology of debt

Credit Canada's Snowball vs Avalanche Debt Calculator is designed to help Canadians with debt figure out the best repayment method, which in many cases comes down to an individual's personality. Despite traditional economic theory, not all financial decision-making is rational – much is based on behavioral, emotional, cultural and social factors. The snowball method involves paying the smallest debts first regardless of the interest rate; it can achieve quick upfront wins which helps motivate people to stay on track. Meanwhile, the avalanche method focuses on the debts with the highest interest rates first, which can save money in the long run.

"Budgeting and debt are inexorably linked," says Laurie Campbell, Credit Canada CEO. "There's no better time than 'budget month' for people to take a step back and holistically review their finances, housing costs and expenses – essentially, how much money is coming in versus how much is going out."

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ISSN 0824-45
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