Tagpersonal debt

Posted July 15, 20111 Comment Consumer Debt

Good debt and Bad debt…. maybe we Canadians have more good debt?

I saw this recent article about Good debt and Bad debt… Canadian Personal debt levels have now surpassed $1.5 trillion. That’s a big number… should we be concerned? I started to wonder how much of this is Bad debt? Let’s take a closer look at these stats.

First, let’s define Good debt.. I agree with the article….to me, it’s debt that is used to accumulate an investment or asset…. and if it’s an investment then you may be able to deduct the interest costs from your income, making it tax-deductible….. investments like a rental property, stocks, bonds, etc would qualify…Borrowing to invest in a rental property is good debt and you can deduct the mortgage interest and other property related costs from the rental income.

Bad debt is any expense where the interest is not tax-deductible and is used to purchase consumer goods… things like borrowing for a vacation, a 60″ TV, that new computer, or leather sofa..etc… Hey, we all spend some money on these items, the key is to have some discipline. Borrowing to buy a TV, computer, take a vacation, etc is generally a bad idea… save up for these purchases and then pay in cash.

Now the stats say that $1.5trillion makes up all personal debt including mortgages…. Hey, wait a minute… outstanding mortgage balances recently topped $1trillion in Canada…. If mortgages are classified as Good debt, then let’s subtract this from the total personal debt total of $1.5trillion…

We now have $500billion in potentially bad debt… So let’s amend the household average debt to $58,000 per family of 4. Is that really a high number? And let’s look at our asset base… Guess what? Our personal asset base is appreciating in value…Here’s a previous article that shows Canadians are borrowing wisely and we just taking advantage of theses record low interest rates to enhance our net worth… And here’s a more recent article from CBC.ca stating our household credit is growing at it’s slowest pace since 2002. Good to see some positive news put out by the media.

Remember, Good debt can help you grow your net worth… Bad debt is for personal lifestyle and usually decreases your net worth… We all have some bad debt, we just need to minimize it as best we can.

Posted February 3, 2011 Case study

Listen to the Professor about how to save money.

Professor Moshe Milevsky is regarded as one of Canada’s leading Financial Experts… He’s written several books on building and preserving your wealth. He’s also done several studies on debt and mortgages. (make sure to visit his site here)

One of my favorites, and one of his best case studies, called “Why these eggs belong in one basket”, was about a strange phenomenon that seemed unique to Canadians. We seem to take the rule of diversification and apply it to our debts. We would rather have a mortgage, a credit card, a car loan, a line of credit, etc…when we should really be looking at consolidating these debts into the lowest possible interest rate.

He concluded that a typical family with $95,000 in total debts, with $2,700 in the bank, is losing about $1,000 per year by diversifying their debts instead of consolidating. Now apply that to your own situation…. maybe your debts total $300,000 or more, how much are you losing per year? $3,000, $4,000 per year or more?

I have my own opinion on why, we Canadians, do this… it must have something to do with our being so conservative…. Our parents taught us to pay off our mortgage first… get rid of that mortgage…. This is good advice… but somehow we thought it was okay to buy that car with a loan or a lease.. after all, everyone finances their car, right? And then there’s the Home Shows on TV… ah yes… We must have the latest in home decor…etc.. you get the picture…Symptoms of the ‘must have now’ generation (a subject for another day).

The Federal Govt thinks Personal Debt levels will go down if we change Mortgage Rules…. By making it harder to get a mortgage, we will slow personal spending habits… My advice is to listen to the Professor… Take your debt, roll it into your mortgage, pay less interest and save money… It’s really that simple…

Should we encourage home ownership or renting?

I found this article about the effects of making it harder to buy a house….. Here’s one of the statements that got me thinking.. “Rather than buy a home for half a million, many are moving out of the community to rent, or living rent free with their parents and buying all this junk.” I wonder how true this is. I must admit, I know several people that are living at home in their 30’s, 40’s and even longer…. They don’t seem motivated to buy a house.

Final message is that Debt Consolidation is not a dirty word. It’s good money management.

Posted January 28, 20112 Comments Consumer Debt

Personal debt level up…uhh, wait.. maybe we made a mistake?!

As you know, I have been very critical about the data that was being put out over the past few months regarding Canada’s personal debt levels.. We were being bombarded with reports and comments about our spending habits… I found it hard to believe that we could go from conservative nation to a casino nation in just a few years…

Sure, there is more debt…. Outstanding mortgage balances topped $1trillion for the first time… but we seemed to be growing at a moderate pace, year over year.. We didn’t have the 20% to 30% increases in real estate prices that we saw in 1987-89, or like our neighbors in the U.S. over the past decade. Meaning there was less chance of a housing bubble or crash.

And what about our assets….? It was hard to find any report about our net worth or assets… There was one report from Ben Tal, Senior Economist CIBC, that didn’t get much notice but we reported it here on December 3rd… here are some of those stats…

-there are 12.5million households in Canada…31% rent, 69% own..

-of the 69% that own, 39.9% have a mortgage and 28.9% have no mortgage.

-69% of homeowners with a mortgage have more than 20% equity in their homes… only 30% have less than 20% equity in their homes.

click here for the full story..

And now for the real stats

Personal debt to disposable income ratio has been reported at 148%… This figure has been recycled more than that gift bag from the wine store you received at Christmas…. and just like that gift bag that gets passed around from friend to friend, it comes with a different bottle… or in this case, different figures and opinions.

Let see how you like this vintage…. Some new reports just came out that should ease our concern about our personal debt levels and average net worth. “Average household net worth has risen to an impressive six times the size of disposable income, up from an average of five times in the 1990s.” That’s a quote from BMO’s Senior Economist, Sal Guatieri… read more here.

What’s this? You mean Canadians are actually investing their money and not spending it frivolously like the Federal Govt has been telling us for the past several months?

It gets better…

Here’s a little more info from CIBC Bank.. Those figures had to do with the personal tax refunds we were getting last year because of the stimulus packages…. “Household debt in the third quarter grew at the slowest pace in nine years, while in the last month for which there is data — October 2010 — it was the softest in 15 years.” read more here.

That’s right, WE ARE SPENDING LESS AND OUR ASSETS ARE GROWING FASTER THAN IN THE 1990’s. … But how can this be? The Federal Govt has been telling us that our personal debt levels are at dangerous levels… and they had to change mortgage rules to slow our spending habits….. Any of this make sense to you?

Here’s an article from Ellen Roseman from The Star that says Canada’s Stock Market has outperformed the U.S. markets for the past 7 years… and we are poised to outperform them for the next 10 years….

Feel good about yourself Canada….. Keep investing… keep borrowing and spending wisely….

Posted November 5, 20101 Comment Consumer Debt

Debt consolidation… it’s not a dirty word

What’s the first thing you think of when someone says ‘debt consolidation’? Trouble… or, you can’t pay your bills…cashflow problems… We probably all think there is some financial problem..

Sure, that’s the popular reaction…and who can blame us for thinking that way with the recent media hype about Personal Debt concerns… One day we have an article saying that Personal Debt levels are high or increasing… The next day, Canadians are conservative and managing our debts well. This flip-flop would confuse anyone. click here for some articles from earlier this year.

But debt consolidation can actually be a good thing most of the time… And that time is now. You’ve heard of ‘buy low and sell high’… Well in credit, you ‘borrower when rates are low to save high amounts of money’…

With record low interest rates it makes sense to borrow….If you own a home, have some equity and have some non-mortgage debt, such as credit cards, a car loan, a student loan, a line of credit, etc… These debts probably carry a higher rate of interest than what you could get through a mortgage… Debt Consolidation is a smart thing….paying less interest puts money in your pocket.

Here’s a good calculator to figure out how much you can save…DEBT CONSOLIDATION CALCULATOR.

Use these rates for comparison…Mortgage rates are well under 4.00% today… a 5 year fixed rate is somewhere around 3.59% and Variable rates are around 2.25%… compare this with 12% to 18% credit cards, 6% lines of credit, 7% car loans, etc… Rolling these debts into a mortgage is not a bad thing, it’s a smart thing. Paying less interest just makes good financial sense.

And as always, speak with someone who knows and understand financial matters… talk with a qualified Mortgage Broker or Financial Planner….

Posted July 23, 2010 Consumer Debt

Bank of Canada rate up by 0.25% and personal debt levels down.

BANK OF CANADA RATE UP

July 20th, 2010….an interesting day. This was the 5th of 8 scheduled Key Interest Rate announcements… No real surprises… the Key rate went up by 0.25%…. the second increase this year…

The new Bank Prime rate is now 2.75%. Variable rate borrowers will see a 0.25% increase in their mortgage rate… but don’t feel too bad… your mortgage is probably just over 2.00%….. that’s much lower than even the lowest 5 year fixed rate mortgage of 3.69% which was being offered mid last year….and recent reports are calling for a very slow and gradual interest rate hike…click here for the latest.

PERSONAL DEBT LEVEL DOWN

Remember the reports about the high personal debt levels that Canadians had? We were spending like fools… according to many “Experts”… And bank on May 13, I questioned these reports….

Now we are seeing that Canadian Personal Debt levels are down….Come on… we didn’t change overnight.. we have just been taking advantage of these record low rates to invest or spend wisely…and what’s wrong with that?.. see the latest stats…