With skyrocketing rent prices and a typical Squamish townhome selling for $751,400 in April, up 129 per cent from just a decade ago, many local residents are feeling strapped for cash.
And Squamish residents aren’t alone. A recent survey by a consumer insolvency company found that 52 per cent of Canadians were $200 away from being unable to pay their bills each month.
The Squamish Chief sat down with Scott Hannah, president and CEO of the not-for-profit Credit Counselling Society, for a chat about how we get into debt and how to get out.
Q: Obviously, in Squamish rent prices and mortgages are putting pressure on people’s budgets, but how else are people getting into debt?
A: People don’t manage their money with a budget. There’s very little thought about what expenses are going to be. Therefore, people are very ill prepared to handle even seasonal expenses that come up year after year. Often what we see is people think they are doing OK because they are making the minimum payments on time, but when you sit down and factor in how much they are actually spending versus their debt repayments, they are hundreds or even thousands of dollars short each month. They have gotten into the bad habit of making the minimum payments and staying in debt as opposed to having the goal of paying it off.
If you are a homeowner, we strongly encourage people to have at least six months of living expenses on hand. You have to have the ability to manage emergencies – a car repair or a layoff.
Q: How much debt do you see people getting into?
A: A lot of it depends on a person’s income, but on average, the people we see would have, in addition to their mortgage, $25,000 to $100,000 of unsecured debt. A lot of that would be credit card debt. Many people, once they become homeowners, will have their financial institution also offer them a line of credit.
Our financial institutions sell financial and insurance products, that is their business.
That doesn’t mean it is in your best interest to take out the loan or take as much as they are offering you. It is so tempting to dip into that line of credit and then it becomes a habit.
Q: There is a stereotype that lower-income people are the ones who are bad with their money, but in my personal experience, that is not the case. Would you agree?
A: The average client we see probably has an annual household income of around $60 to $70,000.
What we tend to see is that people with low incomes typically have lower levels of debt and people with higher incomes have higher levels of debt. Oftentimes we see people with very, very modest incomes get into trouble not because they weren’t able to manage their affairs successfully, but because something major happened – a divorce, for example. What we also see is that people who are on government assistance don’t have access to conventional credit, like overdrafts or credit cards, so often they will turn to a payday loan, and those have terrible rates of interest.
Q: You and others have been sounding the alarm for a number of years about the amount of mortgage debt people are getting into. Can you address that issue?
A: Mortgage rates are slowly creeping up and if you believe that they are always going to be what they are today, I think you are not living in reality. A survey I read said if mortgage rates go up a full percentage point, 700,000 Canadians would be in serious financial trouble.
Q: What else would you like to see governments do in this regard?
A: What the federal government did in terms of tightening up the lending rules around mortgages was a good thing. The best thing our provincial government could do is have a real strong financial literacy curriculum that starts in grade school so when someone graduates from high school not only do they have the knowledge, but they have the confidence to manage money, and credit and investments well. At best we get lip service about these things. Having strong financial skills is every bit as important as reading, writing and arithmetic. And it is not math – there are some math concepts, but financial literacy is well beyond that and goes to goals and values.
Q: What are some of the things people can do if they are reading this and they are up to their ears in debt right now?
A: First, carefully track expenses for a month or so, so we have a complete picture of where the money is going. We also want to see copies of pay stubs so we know exactly how much is coming in. That is important because most people can tell you what they earn a year, but if you ask how much they earn every two weeks, they don’t know exactly. Look at what deductions you have, etcetera. Now we know if your budget is balanced or not. Then we look at what changes you are prepared to make; it is all about looking at small changes in a whole lot of places.
If you can cut back $5 or $10, that may not seem like a lot, but it can add up to a fair amount of money. If you are buying your lunch each day, can you brown-bag it most days and go out only on Fridays? Minimizing process foods will save you money.
Can you make your own coffee instead of buying? Can you scale back on cable? Lots of people use these storage lockers and pay maybe $100 a month. Often what they pay over the course of a year far exceeds the value of the stuff they are storing – so get rid of it. Look at your banking fees.
Then look at the debt. What is it exactly and can we find a better way to pay down your debt? Does it make sense for you to go to the bank and consolidate your debt? It makes sense once your budget is balanced and you are managing money effectively so you aren’t inclined to take on more debt. People need to be setting money aside each month for upcoming expenses. That takes a few months to get to where you are able to do that. It isn’t good to put every nickel and dime toward debt repayment. Even if it is just $50 a month that you put aside for savings that will help if something goes wrong. You have to have a balanced approach.
Q: People worry about what others will think of them if they aren’t buying certain things or doing certain activities. Can you address that?
A: One of the hardest things is people worry about what their friends will think. Be honest. When people ask say, “Look, I can’t afford to do that because we have to save more for our retirement,” or “We are paying off our debt. I am tired of making payments to debt. I want to pay me instead.” Most people will respond to that with, “Good for you. I should be more responsible, like you.”
For more free tools and resources on debt and financial management go to www.nomoredebts.org.
