More evidence that Canadian consumers continue to pile on more and more debt came out Wednesday. Credit report agency TransUnion released statistics showing that average consumer non-mortgage debt jumped by an annual rate of 4.6% in the third quarter to an average of $26,768 per person. Thomas Higgins, TransUnion vice-president noted that in the past five years, debt loads have increased 400 per cent more than the rate of inflation.
Let’s put those staggaring numbers into perspective. The average personal disposable income in Canada in 2011 was just over $38,500. That means that the average person has spent almost 70% of a full year’s take home income on items purchased with debt, not including their home! Basically Canadians are spending their way into debt.
Paying Off Large Debt Loads Difficult
Canadians on average spend 88% of their disposable income on the bare basics: food, clothing, shelter, transportation and health care. This leaves just $4,600 per year to put towards broader needs, discretionary items and debt payment. Let’s assume you put half of that towards debt and you are lucky enough to have good debt, that is, relatively low cost debt like a car loan or line of credit (not credit card debt). Just how long would it take you to pay off your non-mortgage debt if you were the average Canadian? Paying $190 per month at an assumed interest rate of 4% it would take you 192 months to pay off your debt. That’s 16 years! And that assumes you will not add any further debt by spending more than you make during those 16 years. While we all know that a mortgage may have an amortization period of 20 to 25 years, at the end of this time you are hopefully left with a fully paid off house. At the end of 16 years where will your disposable purchases be — your car will likely have been replaced long ago, that vacation is long gone and so on.
If you are burdened with debt, start with these 5 easy steps to reduce your debt:
- Take a look at what you are spending. Credit cards may be part of the problem. Having access to credit may tempt you into buying more than you really should. If you can’t control your spending, consider leaving your credit cards at home.
- Set a goal. If you are living paycheque to paycheque, you have less incentive to tackle your debt. The task just seems too challenging so you put it off a little longer. One way to get started in reducing your debt is to have a clear goal. Another way is to have money automatically deducted from your account each month and put towards you debt (or savings once your debt is paid off.)
- Get help. If you need budgeting help, contact a not-for-profit credit counselling agency who can help you review your budget and put you on a path towards paying down your debt. Your needs may be a simple as basic budgeting advice or you may need to set up a payment plan with the help of a credit counsellor, known as a Debt Management Plan. If your debts are more than you think you can pay in full, talk to a Trustee in Bankruptcy about how a debt settlement plan through a formal Consumer Proposal may help.
- Do it now. Make reducing your debt your number one priority. Talk to an expert. It takes just 30 minutes to sit down and discuss your situation with a debt professional. The sooner your get started reducing your debt, the less interest you will pay and the faster you will become debt free.
- Stay Debt Free. Once you have eliminated your debt, stay that way. Set up new goals including savings goals. Plan ahead for major expenditures and ensure that your have the money set aside before your buy.