Don't join this club

Are you part of Canada’s special club?

The club involves the almost 10 per cent of Canadian households that owe 350 per cent or more of their gross annual income in debts.  

In other words, for every $1 they earn of gross income, they owe at least $3.50 in loans and other debts.

This group is carrying about a fifth of all Canadian household debt and is one of several reasons why the Canadian economy and markets are in a lot worse shape than many are led to believe. 

In a speech last week, Bank of Canada Governor Poloz stated:

• “We are closely watching the vulnerability represented by this group and the debt they carry, and how it poses a risk to both the financial system and the economy.” 

The thing is, he’s pretty much stuck between a rock and a hard place. 

If the BoC raises rates too quickly, they risk choking off growth and putting significantly more pressure on Canada’s debt bubble. But if they don’t raise interest rates, the risk of inflation buildup and people continuing to spend money they don’t have is equally problematic. 

After Governor Poloz’s speech, several key economists were quick to point out that there really wasn’t much that the BoC can do since the problem has already become too big.

There is simply no good course of action that they can take to help our nation out of this mess without some level of pain.

Just think what would happen if half of the “special club” with too much debt were to file for bankruptcy when interest rate increases make their debt loads unmanageable. What would that do to our housing markets and economy as a whole?    

Canada’s household debt concerns are just another layer of pressure to our economy that also includes:

• the ongoing threat to NAFTA
• diverging tax strategies with the U.S.
• out of control federal debt
• a lack of a national energy policy that is scaring away the few investors that remain.  

Former Bank of Canada governor David Dodge commented last week that Canada is doing a number of things to “shoot ourselves in the foot” when it comes to economic competitiveness.

That view seems to be shared by virtually every economist, analyst and investment professional that can comment freely and doesn’t have a political stake to lose by being honest. 

The reason for repeating all of this information that most people have already heard?

Somehow, the message still isn’t sinking in with a good majority of our population.

Many people are willfully ignoring their debt and overall financial situation and unfortunately, choosing to ignore a problem will not make it go away. 

A recent report conducted by Oxford University showed that perceived financial well-being holds the key to your overall well-being.

But an updated survey released today by the Financial Planning Standards Council showed that 51 per cent of Canadians were embarrassed by their lack of control over their own financial situation (up from the 44 per cent figure found in the same survey run in 2014).

his just further illustrates that the finances of Canadians are getting worse and not better. 

So, what should we do?

First, we need to stop spending so much money.

• Thinking of buying a bigger house right now?
• Is it time for a new car?
• Planning a big family vacation?

This may just not be the right time for any big purchases or anything that will add to your debt load. 

Step two is to build or update your financial plan.

Your plan should include steps to pay down any debt that you have, ensure you build up enough money for retirement and consider the rising interest rates that we know are coming.

Your level of exposure to Canadian equities should also be reviewed.

Most economists are predicting a rough patch for the Canadian economy in the near future and the best thing you can do is to make sure your own finances are as well prepared as possible.

While I hope that we’re all wrong, we probably won’t be, so you should be prepared.     

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.