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A Very Practical Newsletter

You may have noticed that we are not as keen on the Canadian economy lately. Here’s one of the reasons why.  

The average ratio of debt to household income ratio in Canada is now currently at a high, 175%.  Meaning that for every $100,000 of family income a person owes $175,000. Two years ago it was 160% in both Canada and the US. As of now, the Americans have had a far better time of saving. Their ratio is 135%. We Canadians have become worse, 175%.  We are figuratively burning the furniture to heat the house.

In these days of easy credit, no-one buys anything anymore, they finance it. Taking the used car market as an example, if you try to sell a car on Kijijii, there are immediately used car sellers at the ready on a response to the lowest level. They do this in the hope that they can turn around, post it and sell it almost sight unseen at little gain, with the most important benefit being that they can finance it for the potential buyer. The terms of the borrowing are most often credit choking, but in the day where many others are about instant gratification and the STEM subjects (science, technology, engineering and math) seem to be taking a back seat, free money seems like a good choice, until it’s not. 

People borrow to excess because average buyers are now susceptible at several levels: 

  1. They do not write a cheque for a new or used purchase (car, couch, TV as examples). They finance them at their current income levels, at extortionary interest rates to satiate the immediate need. 
  2. Interest rates are still at historic lows. There has been a prolonged period of declining interest which has served fixed income investors well. That time seems to be ending and when interest rates go up, two things happen; for investors, rising rates mean a decline in the underlying value of the asset, for borrowers, they have to pay more to service their already inflated debt. Neither of those is a good scenario.   
  3. For those in an age group (35 – 45) they have never really experienced a nasty economic pull back personally. It’s one thing to read about it in the press, it’s quite another to see your account deviate meaningfully. As well when you are 35 to 45, you likely haven’t had enough money, or paid enough attention to become urgently aware. The outcome of that scenario is grim. 

It is hard to change behaviour to be more disciplined, but change is always a good thing and makes you learn, particularly if the outcome of change is a significant improvement of lifestyle down the road. This is very hard for people to grasp but if a person can make small adjustments or sacrifices early in life it will prevent colossal differences later. 

For those of us who are “Pirates over Forty” there is still time to adjust and enjoy life to the fullest. Continuing a saving habit and living within our means is and always has been a key to success. Although difficult, just cancel the order on the Bentley, settle on something lesser and bank the rest. You’ll need it later. 

Have your spending habits changed over the years? Are you financing items for which you used to pay cash? Does the trend worry you? Let us know your thoughts.