Dealing with Debt
It is no secret that a significant part of the Canadian population is finding it exceedingly difficult to make ends meet. Debt is extremely high per household, primarily as a consequence of large mortgages and more recently, high interest rates. While inflation is slowly diminishing, the announcement that the Consumer Price Index (CPI) rose 3.4% on a year-over-year basis in December 2023, greater than the 3.1% rate in November 2023, is a reminder that inflation will not decrease in a straight line nor will all consumer goods and service prices adjust at the same pace. Where do Canadians stand, and how can we respond?
How much debt is out there?
According to a Statistics Canada report released on January 19, 2024, “In November (2023), the total credit liabilities of households increased $7.4 billion (+0.3%) to reach $2,903.1 billion.” Most of that increase ($5.5 billion) was represented in “real estate secured debt,” i.e., mortgages and home equity lines of credit (HELOCs). Of the remaining $1.9 billion increase, credit card debt held with chartered banks made up $1.4 billion.
These large aggregations of numbers do not give us a sense of what the typical household is dealing with. According to the 2021 census, there were 10,262,925 “census families.” This excludes single-person households, which make up 29.3% of private households in Canada. If we include the households made up of single persons, I estimate the total number at 14,516,160 (= 10,262,925 ÷ [100% – 29.3%]).
However, since approximately one-third of Canadian households rent, we need to make some adjustments. The number of households who are homeowners is about 9.65 million. Mortgage and HELOC debt make up approximately 74.3% of total household debt, so of the $2.9 trillion (easier to write than $2,903.1 billion) in liabilities, about $2.157 trillion is in mortgage/HELOC debt. Next, if we consider that about 35.5% of Canadian homeowners had a mortgage in 2023, then that debt is owed by about 3,427,000 households. The corresponding consumer liabilities for the same portion of the population is about $197 billion. Added together and divided by 3.427 million households, you have a debt of $687,000 per mortgaged homeowner household.
Addressing the Problem
The only way to reduce your debt is to increase your income and/or reduce your spending so that you are living below your means. The resulting extra money needs to go toward paying down your debt.
Increase Your Income
This may or may not be a reasonable solution. If you are in a job you enjoy and feel you are reasonably well-compensated, then leaving that job behind for a higher paying one, or adding a second job that you don’t enjoy or don’t feel suits you may not be sustainable, which will put you in a worse position. However, if your skills and personal capacities are such that you could find a better-paying job, then taking that step could be quite valuable to you.
Decrease Your Spending
A “spending audit” sounds a bit tedious, but I suspect most people would find that a better alternative to losing their home or having to enter into a consumer proposal or more drastically, bankruptcy.
On a personal note, for several years I have kept a spreadsheet that tracks the movement of every dollar. It’s not a budget as such, because I don’t impose a limit on any of the spending categories. However, each year, I compare our spending to the previous year and investigate any major changes. You may not have years to compare but tracking your expenses for even a few months can help build a picture that you can then work on.
Spending Categories
Taxes
Among the biggest – and unavoidable – expenses are taxes and mandatory payroll deductions such as income tax, Canada (or Quebec) Pension Plan, and Employment Insurance.
Reducing Spending on Taxes
There’s not much you can do about these items unless you qualify for certain tax deductions or credits. Examples could include contributions to an RRSP, which reduces your taxable income; doing so can also help by allowing your family to qualify for a larger Canada Child Benefit, if applicable. Other possible ways to reduce taxes include credits for those who are over age 65, those who are disabled, the caregiver amount, medical expenses, and education. Many of these require spending some money first, though, so they won’t always lead to a net improvement in cash flow.
Household Needs
Then there are the expenses that are simply a basic part of life: food, clothing and shoes, transportation costs (fuel, maintenance, and repairs for vehicles; public transit), and dental/healthcare costs that are not covered by insurance.
Reducing Spending on Household Needs
While food is a necessity, not all kinds of food need to be purchased. Just in the last few days, Loblaws, which had discounted food near expiry by 50%, had cut the discount to 30% only to reverse it after a public backlash. Perfectly edible food can be obtained this way by looking through the discount racks at your local grocer. Merchandising specialists for the major supermarkets are well aware of the kinds of displays that will entice shoppers to buy something on impulse. Making a shopping list and sticking to it is a good way to get around this issue, although unexpected discounts or sales should prompt some flexibility.
Taking cues from the ultra-wealthy like the late Apple co-founder Steve Jobs or the Facebook (Meta) co-founder Mark Zuckerberg, seems an unlikely place to find ways to save money, but they are well-known for their simple clothing choices. Good quality durable clothing and shoes, bought when necessary, can save money over some of the theoretically less expensive “fast fashion” choices.
After housing, transportation is probably the most expensive category of spending. Households of two or more will often have two (or more!) vehicles. If you have access to reasonable public transit and can, therefore, eliminate one vehicle, thousands of dollars can be saved annually. Even better, if you have a job that allows you to work remotely, you can save time and money by being able to work from home.
I am not a fan of trying to save on dental or healthcare costs. If you have group benefits that cover these costs, take advantage of them, but even if you don’t, I cannot advocate for neglecting dental care or other health-related needs. These are truly needs that need to be met. Although our public healthcare system is appearing quite ragged these days, it has truly levelled the field in the sense that people with limited means can access needed surgical or medical care. Public funding to support dental care appears to be on the horizon as well, although, after a recent visit to my dentist, I learned that they had not yet received any information on the matter.
Shelter Costs
If you own a home, beyond your mortgage or HELOC, you also have to consider property insurance, utilities, property tax, and maintenance/repairs. Even though we don’t have a landline anymore, we still include our cell phones in this category.
Reducing Spending on Shelter Costs
One of the biggest ways to save money on shelter costs is to move. How mobile are you? Cities like Winnipeg and Edmonton are a lot more affordable than Toronto or Vancouver. Maybe you can’t move provinces but perhaps you can relocate to a more affordable home. A modest townhouse may be able to serve your needs – if not all your wants – as well as a larger home. On the utilities side, reducing the temperature setting on your thermostat can be effective, especially when you are asleep. A programmable thermostat can make that work more easily for you.
Insurance
There are multiple forms of insurance that most Canadians should pay for beyond insuring their home against loss. Even if you don’t own a home, a renter should have some form of tenant insurance. Other items are life insurance and disability insurance, especially if there are people in your household who depend on you for financial support. These two may be available through your employer as would extended health benefits coverage, but there are optional levels and group benefits coverage may not always be adequate for your needs. Automobile insurance should also be attended to if you own a vehicle. In addition, you will want to make sure that your property and auto insurance policies include some form of liability coverage.
Reducing Spending on Insurance
I am a strong advocate for the right kinds of insurance. You can think of insurance as a necessary expense to protect you against a potentially catastrophic loss. How easily can you replace your house if it burned to the ground? If you died prematurely, how easily could your spouse or child(ren) live without your income? If you suffered a lifelong disability, or even one of shorter duration, that prevented you from working, what would happen to you or your family?
What kind of insurance do you need, though? I will highlight life insurance here. While there are uses for permanent insurance in estate planning, such as to leave an inheritance or pay final taxes, younger households will usually do better to focus on term insurance to replace income, pay off the mortgage, provide for future educational costs for children, etc. The idea is that, once the mortgage is paid off, once you are retired, and once your children have gotten launched on their careers, the potential for catastrophic financial loss from an early death no longer exists.
Flexible Needs
Here I would put things like vacations, cable TV/streaming services/internet, restaurants/alcohol, gifts, and tuition. These days, internet fees could be included as a component of the utilities expense under Shelter Costs, but since internet providers are often the same folks who also offer cable TV and are heavily used to access streaming services like Netflix, Crave, or Amazon Prime Video, this still feels like the best category.
Reducing Spending on Flexible Needs
We human beings are complex creatures; an opportunity to get away on a vacation may validly be considered a necessity. Travelling to an exotic destination overseas, while very much a “nice to have” thing, is not a necessity. When I was a child growing up in Chilliwack, BC, vacation trips were for visits to family in Manitoba or to relatively nearby campsites in the Okanagan. This is not to suggest that there isn’t value in travelling to a different country and culture, but a less expensive vacation that still allows a change of pace from the normal routine can have its value. Even if you travel farther away, you may be able to stay at a place that has a kitchen and prepare your own food. Another option is to look for activities you can engage in for free.
There is a podcast host who I frequently listen to, an expert on investing, who has said he will never “cut the cable.” Moreover, he says he subscribes to every streaming service available. However, if you are having difficulty making ends meet, then you may want to take the step that this podcaster won’t. Review your cable and streaming services and ask yourself which one (or more!) you can manage without.
Restaurants: My recommendation is to cut that out entirely until you are no longer struggling from paycheque to paycheque. Instead, get together with your friends, whether at your home or someone else’s, and ask everyone to bring something that they made. Both your food and your conversation will be healthier for it.
Major Appliances and Expenditures
This is less commonly an issue for renters, but homeowners will periodically have to replace things like refrigerators, oven ranges, dishwashers, washing machines, dryers, etc., so some degree of spending needs to be expected here.
Reducing Spending on Major Appliances
Major appliances may or may not need replacing without warning. My best suggestion here is to set aside money in an emergency fund so that you don’t have to borrow money on a credit card that will take you months to pay off.
Miscellaneous Spending
I include charitable donations in this category and potentially anything else that doesn’t fit. This is different than gift giving in that the former is given to registered charities and generates a tax credit. Gift giving, on the other hand, is usually given to family and friends and typically on special occasions such as holidays and birthdays.
Reducing Spending on Miscellaneous Spending
I will confine myself to charitable giving. You may have strong convictions about supporting certain charitable activities. However, if the money is tight, you may not have the option to donate as much as you would like. In that case, you may be able to donate in kind by providing volunteer hours.
Saving
This includes money that goes into your RRSPs, TFSAs, pension plans, and non-registered savings. If you work for a publicly traded corporation, you may also participate in an employee stock ownership plan.
Reducing Spending on Saving
While I think saving is essential, and I am reluctant to suggest people not put money toward it, if someone is attempting to reduce their debt, saving may be a net negative. That is, if you have a mortgage or any other debt with an interest rate of 5% or higher, you may be hard-pressed to generate an investment return that will exceed the interest charge on your debt. Unsecured lines of credit these days are charging around 10% and if you carry a balance on your credit card, you are probably paying interest at 20% or more.
A caution, though, is that, especially with mortgage debt, when so much of Canadians’ net worth is made up of residential real estate (i.e., our homes), a focus on paying down the mortgage as fast as possible may lead to excess concentration on one highly undiversified asset.
How to balance that out? If there is a savings plan to which your employer contributes, such as a group RRSP or an employee stock ownership plan, I would encourage investment in those opportunities. The contribution from your employer will most likely add somewhere between 30% to 100%, if not more, to your effective return.
I would recommend working on building up an emergency fund, even if only a little at a time until you get to a minimum of three months of spending. And, if you own a home or have children, consider setting your target at six months of spending. This helps add a bit of flexibility to the ups and downs of your spending.
Simultaneously, if you have high-interest debt, knock that down as fast as possible. High-interest debt will keep you in a financial straitjacket. I should add that, if you have debt on your credit card, you should seriously consider opening a line of credit that might still charge a fairly high interest rate, but that will charge less than your card. That will help you, but only if you manage to pay off your credit card balance in full on the due date in the future and work steadily at reducing the debt on the line of credit. The emergency fund can be worked at more slowly in that case, but ultimately, its purpose is to have it available for you so you don’t need to carry high-interest debt.
Everyone needs to address their own circumstances, and for those who are at the lower end of the income spectrum, the ability to cut back even further may be limited. But I encourage you to make the effort.
This is the 232nd blog post for Russ Writes, first published on 2024-01-22
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.
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