Canadians don’t think they are better off financially now compared to a year ago and most are even more worried about the future.
Does this sound like you? Should you be worried?
The answer is probably yes. And here’s why.
Consumer debt in Canada is too high. Household debt-to-income in Canada rose to 165% in the third quarter of 2012 and does not look like it is going the decline any time soon. Even if you are not deep in debt yourself you should still be concerned. Massive loan defaults are what caused the last financial crisis. Canada survived the last recession fairly well but if our own house of cards begin to tumble because of higher debt defaults by Canadians we may not do so well the second time around.
Interest rates will rise. We keep hearing the warnings about the risk of rising interest rates. Unfortunately we are largely ignoring these threats. If you owe money, you should be concerned about the risk of higher interest rates. Even if you are able to pay your debts today, will you be able to keep up with your debt payments if interest rates increase?
The economy is slowing. The economic recovery over the past few quarters has been fairly fragile. Recent job growth gains may be put at risk as there is just not a lot of cushion for a fall right now. Do you have enough set aside in an emergency fund to make ends meet for a while should you lose your job?
Consumer spending grows. While this may be good for the economy let’s think back to point number one — consumer debt is too high. Canadians are spending yes — but they are borrowing to do so. If you are spending more than you are earning, now is the time to get your personal finances back in order.
Household savings are down. If you are spending more than you earn (which most Canadians are) there are only two options — take it from savings or borrow it. Unfortunately Canadians are doing both. In the event of another recession, the lack of household savings leaves no wiggle room to handle a job loss or income reduction.
What can you do to cushion yourself in the even we do go over a fiscal cliff?
Know where you are today. Start by making a personal budget and look at where you may be able to reduce your spending. Sit down and make a list of what you owe. Reducing your debt by even small amounts will free up cash flow to put towards the larger debts. Make your objective complete debt elimination. Concentrate on paying off your debt faster so if the economy does begin to slip backwards, you will be in better shape to handle what may come.