Its no secret that Canadians are waking up scratching their heads trying to determine why they have little disposable income and they just got paid. With the average Canadian carrying over $25,000 in debt excluding their mortgage, the situation is grim. What transpired to set the stage for environment that lumped so many people together despite their income differences?
Remember the time when your parents saved for everything? Can you imagine saving for a car, or vacation? Access to credit has never been so easy as it is today. Credit Card companies are promoting their credit offering using numerous avenues. Each month the mail box is full, airports have kiosks, and even most recently in my travels i noticed credit card lounges at certain airports. These lounges allow you to come and relax in their dedicated airport setting. The concept is simple put more credit in the hands of the consumer not manage the credit. Society has fell into the trap of painless purchase. Saving requires work but for some reason repayment of credit seems like less work. I guess it could be labeled as deferred pain, because there are penalties of credit versus savings. The main penalty is called interest! Interest paid is a lot more painful and expensive than interest earned. So the bottom line is that we have grown accustomed to adhoc purchases using lines of credit and credit cards. The payments are small and as a result the debt lingers well beyond traditional loan repayment terms. Savings have been demoralized to a point where people are not even concerned about the rainy day. What are we teaching our kids? I am just as guilty as the next parent, new bikes, Ipods, etc are available to our kids and almost now to a point where they expect it. My daughter lost her DS game console and when I questioned her where it was, she replied "no worries if we can't find it, you can buy me a new one". In essence, we are not only making the situation bad for ourselves, we are pulling our kids into the trap as well. We are leading by example the concept that if you want something today, you can get it, no need to save and wait!
Want versus need. At our credit union we are seeing members finding themselves in debt stacked situations based on the want versus need theory. Young adults mainly just starting out are securing recreational vehicles, expensive homes, and carring large credit card balances. When you look at their total financial picture it's intersting that despite they recognize that they have no disposable income, they have no issue having loans for stuff they simply do not need.
Here is the kicker, it is our obligation as financial consultants to highlight to these people that despite their good intentions they are making poor financial decisions. Most times these reality checks are not taken well and they immediately want to move to the next financial institution who will grant them credit. The road to further debt has not come to an end until they have exhausted all means of getting credit, and then a light bulb comes on. In short, consumers today pay little attention about the financial pain or sacrifice of a purchase and focus on the good feeling of owning that asset. If you consider a question...would you rather have a nice new sports car, or ensure your child's education is paid for, most people put in that situation would choose their children's education. Why is it then that we cannot make this realization today when we need time to save.
Interest rates have been so attractive, the perception is that the cost to credit is not hitting our pocket book hard. When considering a new vehicle and the advertised interest rate is 0.09% our reaction is wow, that is a great deal, I should take advantage of that offer before it goes away. Dealerships have also got smart when it comes to advertising affordability for new cars. Traditionally a car would be advertised at its purchase price. The purchase price kept growing and consumers slowly started to think that a new vehicle is out of reach. So then they advertised a monthly payment that killed the pain somewhat until vehicle prices became so high that the monthly payment became high as well. Then they extended the time in which you can take a vehicle loan out for. Loans that started out as 4 years now were exceeding 7 years to repay. Vehicle prices continued to climb and so did the monthly payment so advertising was changed to bi-weekly and weekly installments to perceive that the purchase is now in reach. These ploys worked and more and more consumers found themselves buying expensive cars that also carried expensive maintenance. These large payments again restricted a person's disposable income.
So the big question is "what now"? If you fall into any one of these situations, you need to make a change today!
First, savings need to be revisited. You might not think you can save at this point but there are always ways to have a force savings. Leading Edge Credit Union has a monthly savings product similar to a bond that can be taken out of your pay check. With no limits you can choose a small deduction to get you started and on the right path. Pay yourself first! You pay every other company out there each month, and as a result neglect yourself. You will thank me Christmas time when you have money in this account to do some shopping!
Second, keep one credit card and get rid of the rest! You do not need a retail store card! The rates are high and the rewards are simply not worth the price of the card. Get down to one credit card that has a good rate and benefits that suit you. http://www.cuets.ca/products/index.html is a link to Leading Edge Credit Cards so you can compare what you have now. I would also suggest that you speak to your branch to get more information.
Third, if you carry a balance on cards that you want to close, call the company and tell them to reduce your limit to zero. This will prevent you from further using the cards and to focus on simply making payments.
Forth, apply for a consolidation loan to pay off your outstanding debt into one manageable payment. The interest rate may also be lower than the debt you're consolidating, which can save you interest and repayment time.
Fifth, dump the ski-doo that you only put 200 KMs on last winter. Recreational vehicle loans can be hefty and eat at your disposable income despite their limited use. This course of action is not for everyone, but if you are having financial difficulty you really do not need a shed full of toys. Recently I reviewed an application for a loan and noticed credit card debt at a value of $12,000 at 19%. The member had a brand new side by side, snow machine and motorcycle. Struggling to find ends meet was applying for a consolidation loan. If the member sold all three machines, the savings would have been over $800 a month. Consolidation is not the right answer in this case, reduction of assets which are chipping away at disposable income is the answer.
Sixth, set a budget. When you start writing down your financial commitments and matching your income, it becomes a scary exercise. Take the debt and really analyze what your paying, how much interest you're paying and when it will be paid off. credit card debt using minimum suggested repayments extend well beyond 15 years of repayment. New legislation has forced credit card companies to disclose on a consumer's statement the length of time it will take to repay credit card debt. This allows for a quick reality check of what this debt looks like. The purpose of a budget is to allocate your income to expenditures so that you can ensure an appropriate financial path. If you cannot commit to a budget, at least prepare one to bring things to light on your financial health. Here is a link to a budget worksheet on LECU website https://www.lecu.ca/Home/ToolsAndCalculators/Calculators/HomeBudget/
Recognizing that debt restructuring has to occur is vital. Nothing can change with your personal financial situation unless you make it happen. The staff at Leading Edge Credit Union want to ensure that you are not alone. We are here to assist you with your financial future and provide real financial support.
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