Canadians Loving Debt?

If you have been reading any newspapers or news magazines over the past couple of months, you probably have read a few articles about how Canadians' household/personal debt is worrisome.  Since the economic troubles started 3 years ago, Americans have been working hard to both lower their personal debt and to increase their personal savings.  This is great because their personal debt had risen to around an average personal debt load of 150% of annual income and savings was around 0% for a few years leading up to 2007.  This significant economic event has shaken up the Americans and has caused consumers to change their spending and saving behaviour.

However, the economic event has not shaken up Canadians enough to change behaviour in the same way.  In fact, our reputation as savers is going out the window.  Over the past several years our savings rate dropped not only to 0%, but there were quarters where it was negative, meaning people were dipping into their savings to spend money on homes/vehicles or other items.  And our personal debt to annual income ratio has risen to just below that of the Americans with ours now at over 147%.  Much of this is because with today's low mortgage rates, people have been buying the largest house they could afford, not taking into account that rates won't always stay this low.

What does this mean for us?

• As rates increase, and they will, servicing the debt at these high levels will become very difficult for most Canadian households, which will force Canadians to change their behaviour.  Many will have missed the opportunity to pay down debt during the lowest ever rate environment and will have to concentrate on being able to make the rising payments.
• The activities that many Canadians have enjoyed over the past several years, annual trips, eating out a few times a week... will probably decrease as people try to decrease expenses.
• The rising rates will encourage more saving as current low returns make people feel like they might as well spend the money as they don't make much saving it.

Hopefully, you have enough years left before retirement to pay down debt and improve your savings/investment nest egg.

Jonathon Chevreau, Wealthy Boomer columnist for the Financial Post, recently wrote an article trying to emphasize Freedom, not Stuff.  It's worth a read and may encourage some to review their own habits and what the future may hold for them.