Pattie's Blog: Why debt is evil and how to cut it down
Published Thursday, August 23, 2012 1:54PM EDT
Last Updated Thursday, August 23, 2012 2:32PM EDT
Consumer debt hits an eight year high! Really, what are we thinking?
In a report released by TransUnion, indications are that non-mortgage debt levels are rising and in fact, have hit a record high -- $26,221 per person, which is up $192 from the previous quarter.
When you drill down into the numbers, you see this is the second consecutive quarter the number has gone up and while it is not a trend -- yet -- it is a reversal from the previous two years where we were witnessing a deceleration in debt accumulation.
You have to wonder why.
As the global economies work to get their financial homes in order, on a personal level why aren't we doing the same thing? It may have something to do with our ongoing belief that interest rates will soon rise, and we need to act fast to get a bargain.
In the past, you may have been hesitant to go out and buy a car for fear you could lose your job. Now, as we seem to be muddling through this economic downturn, there is a feeling that now may be the best time to buy, in order to take advantage of low interest rates.
Here is the good news. Employment levels are in Canada are better than most countries and as a result we aren’t seeing a sharp increase in delinquent payments and bankruptcies are at a record low, which is somewhat ironic.
I will challenge you though to ask yourself what would happen to your family’s financial situation if there was an economic shock, and Europe once again becomes front page news? What if interest rates do move higher, sooner than you thought? The point is there are still a whole host of unknowns and I don’t think now is the time to be taking on more risk and higher debt levels.
If you are wondering if you have too much debt, here are just a few things to consider:
- Are you using one credit card to pay off the balance of another card?
- Are you making only the minimum payment each month on your outstanding debt?
- Are you using a credit to pay for day-to-day necessities?
- Are you spending more than 15 per cent of your net income to pay off your debt and living paycheque-to-paycheque?
- Are you afraid to answer the door or phone for fear it is a collection agency?
If you feel you are in over your head and spiralling out of control you may need professional help, and I would encourage you to seek it out. If you feel some changes made today could get your financial house in order, you may want to begin by getting a better understanding of your spending habits.
As George Carlin once said, “I have to buy a bigger house to put all my stuff in.” That really says it all. We are a consumer generation, but amid these tough economic times, we really need to look for ways to live below our means.
One way of doing that is to try to create a savings habit. Live off one salary if you are in a relationship. Use only cash, be bold and cut out all unnecessary spending. And your motivation should be the magic of compounding -- the rule of 72. If you have outstanding debt and are paying 18 per cent of your income on that debt, the rule of 72 suggests (72 divided by the rate of 18 per cent) that the debt will double in four years.
On the other hand, if you are saving and receiving a 6 per cent return on your investment, using the same rule your portfolio will double in 12 years.
This is the classical example of how time and compounding can work wonderfully well for you when you are saving and can destroy your financial plan when you owe money. Now, I know most of this outstanding debt isn’t at 18 per cent but it does illustrate the point.
Bottom line -- habits have a way of taking on a life of their own and as we know, there are good habits and bad habits.