With the low interest rate environment sticking around for the foreseeable future, it shouldn’t come as any surprise Canadians are in no hurry to repay their debt. Who is the most in debt? This may surprise you – those earnings over $100,000 annually with university degrees living in Canada’s strongest provinces (B.C., Alberta and Ontario). The Financial Post recently looked at the trend of wealthy individuals carrying the most household debt. These individuals owe almost two times their yearly salaries in debt – yikes!
Falling Victim to Lifestyle Inflation
Over seven in 10 families (71 percent) had household debt in 2012, according to Statistics Canada. Where is this new debt coming from? While mortgages account for the lion’s share, the growing debt can also be attributed to money borrowed to pay for new cars, home renovations, and big screen TV, to name a few things. Simply put, people are falling victim to lifestyle inflation – as their earnings increase, so does their spending.
The rising household debt is a good news, bad news story. The newfound debt isn’t because of frivolous credit card spending or the working poor borrowing to make ends meet. It’s mostly middle and upper earners borrowing for the rising cost of living.
From Savers to Spenders
Canada wasn’t always a nation of spenders. Turn back the clock three decades ago and we were a nation of savers. In 1982, the average Canadian saved 20 percent of his yearly income. Fast forward to last year, and that rate is down to a measly 3.6 percent. To put this into perspective, our combined household debt totals a whopping $1.82-trillion.
Families that earn more than $100,000 in total income make up over a third (37 percent) of all debt in our country. While Canadians like to pride ourselves as more financially responsible than Americans who suffered a housing meltdown in the late 2000’s, even Americans are saving more than Canadians. In fact, Greece is the only nation with a faster growing household debt level than Canada.
Carrying Debt into Retirement No Longer Taboo
The rising cost of living has changed how Canadians deal with debt. Canadians are introduced to debt at an early age. When most students go to school, they need student loans to pay for their studies. Soon enough these young adults will have car loans and credit cards. Due to the lack of financial literacy at school, these young adults have to learn (sometimes the hard way) how to deal with debt.
The debt level doesn’t ease up. Before student loans are paid off, individuals often decide to purchase a home. With housing prices on the rise, many people are doing something that used to be considered taboo: carrying debt into retirement. The facts don’t lie: 43 percent of seniors (those aged 65 and over) are carrying debt into their golden years, up from 27 percent in 1999, according to Statistics Canada.
The Bottom Line
We’ve only given you a glimpse into the debt situation in Canada. Although debt is a fact of life, it’s important to keep your debt under control. This starts with your credit card. Use your credit card responsibly – only buy what you can afford to pay off in full once your outstanding balance is due. Don’t get too bogged down in debt. It might be worth buying a smaller house, if it means not being a slave to your mortgage. It’s no fun being house rich, cash poor.
