Each quarter the credit reporting company puts out a press release about our nation’s personal debt levels. The headlines tell the story. “Personal debt levels shifting back to growth mode,” screams the headline from TransUnion’s recent release. And, should you dare to read on you’ll discover that average consumer debt, excluding mortgages, is $26,221. While that’s an astonishing figure, it’s not the worst part. The fact that the figure keeps increasing seems to suggest that Canadians don’t give a damn about debt.
On September 25, bankruptcy trustees Hoyes, Michalos & Associates released a poll that reinforces this attitude. The survey found that nine out of 10 respondents would consider borrowing money to cover an unexpected cost. The survey, which was conducted by Harris/Decima and involved 1,010 Canadians, also found that 26% of respondents have a higher debt level than they did a year ago, while 70% of those surveyed said they need “immediate” help with their finances.
“It’s frightening to see that Canadians have become totally blasé about debt,” said Douglas Hoyes, the trustee company’s co-founder, in a release. “It’s becoming their new ‘normal’ and they’re numb to this dangerous trend.”
He’s right that these numbers are scary. When—not if—interest rates rise, this debt will become more expensive. According to TransUnion’s most recent report, Canadians who have tapped their line of credit are carrying an average balance of $33,271. Interest on that debt will jump when rates increase.
Of course, none of this should be news to anyone. Bank of Canada governor Mark Carney has repeatedly told us that our debt levels are too high and countless articles have been written espousing advice on how to clean up our personal balance sheets.
Yet, debt levels keep rising.
It’s no longer good enough to simply hold out that growing household debt figure and hope it shocks people into lowering their debt. If a massive financial crisis couldn’t get people to be more prudent about their finances it’s hard to know what will.
The question we should really be asking ourselves now is this: why don’t people care about debt?
I asked Claire Tsai, a professor at the Rotman School of Business, for her thoughts. She’s studied behaviours around debt and spending and found that we simply don’t have enough will power to save. All it takes is a 10-minute walk through the mall on a Saturday to see that she’s right. “Spending comes with immediate pleasure that is difficult to resist,” she says. “People aren’t very good at self control.”
You’d think that seeing your bank account balance rise and your debt levels fall would also be gratifying. Not so, say Tsai. It often takes too long to see a meaningful bank balance and, even if you do save, it’s hard to get excited about cash you can’t touch. “The long-term benefits (of saving) are very ambiguous,” she says. “People don’t know how much they need to save for retirement or even how much they need to pay off their debt.”
Another problem, Tsai says, is that people don’t pay enough attention to the consequences of their actions—especially actions that are repeated every day. You might call this the Starbucks effect. Spending $5 on a coffee may not seem like much on a day-to-day basis, but over time and you’d be astonished to see how much you’ve spent for your morning caffeine jolt. (If you’re wondering it’s $1,825 a year.) “People don’t look at spending as one thing,” she says. “They don’t integrate their consumption.”
Then there are the tricks we play with ourselves. Who hasn’t rewarded themselves with a little, but perhaps not-so-cheap, toy or treat after a stressful day of work? “I worked hard today so I deserve a reward,” she says. “It’s justifiable.”
Add all of this together and it’s no wonder we have a debt problem.
Fortunately, there are some ways to get a handle on this before it’s too late. The best thing to do is create a financial plan. Having clear goals and a plan to achieve them does wonders for strengthening will power, Tsai says. It’s easy to see what you need to do to save and people often feel bad when they fail to stick to it.
Also keep things simple. Studies have shown that if someone’s faced with too many investment choices they won’t save at all. Tsai suggests creating three categories for yourself: equity, fixed income and cash. Pick basic investments and then save evenly between all three. Set up an automatic plan that moves money from a chequing account into those investments. The less you have to do the better.
Find an online debt repayment calculator and actually see how long it will take to pay off your debt. Tsai’s found that people start understanding the impact of their spending when they can see, visually in a chart or graph, the damage they’re doing and what they need to do to fix it. “They can see the impact of what setting aside $50 a month would do to their debt,” she says.
When it comes down to it, though, people need to summon the will power to save. However, it may have to take an interest rate increase or a few more frightening debt level reports before Canadians take action. “It’s very hard to change people’s behaviours, especially with something that people find complicated,” Tsai says. “People will experience (the pain) at some point, but right now debt is just a number.”