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How can Canadians Recover From Their Addiction to Debt?

debt

Canadians today are some of the most indebted consumers in the world, loading up with more and more debt with the low interest rates we’ve had the last few years. With the current debt to income ratio now over 170%, it’s the highest of all the developed countries in the world!

Some highlights from a recent survey about debt I found interesting were:

Only about half of the survey respondents claim to be knowledgeable about debt management, and only 41% are comfortable with their current debt levels. Some great recent news is that the Stettler High School will be offering a financial education course for grade 11 and 12 students next school year.

Only one in six Canadians believe their banks helps them pay down debt and put their needs first. The reality is that banks’ business model is earning interest on the money they lend out.

Most are missing the mark. Canadians say being debt-free is a priority, however less than a third achieved their debt reduction goals in the past year. This is an area that a good financial advisor can help with.

There’s a correlation between debt and health. 53% of Canadians believe financial challenges take a toll on their mental or emotional health, and a third say it affects their physical health as well.

Silent treatment: Nearly a third of Canadians are embarrassed or unsure of whom to talk to, and over half seldom talk about their debt with friends or family. This is a stigma people should reach out to their advisor to help them overcome, as there are lots of resources out there to help.

Only 10% of those surveyed said creating a financial plan is a high priority in the next five years. This is scary, because the longer they go without one the deeper in debt they go.

The solution is three-fold. 1 – Parents should educate their children, as having financially savvy children gives them a life-long gift. 2 – Our schools should teach children basic financial skills starting from grade one. 3 – Work with a trusted financial advisor. Those who do are 60% more likely to be satisfied with their overall financial health and on track with their savings and debt reduction plans.

The simple secret to building wealth is to spend less than you earn. A good aim is to save five to ten percent of what you earn every month. Start with a “stuff happens” account, ideally into a tax-free savings account so that you have at least three months of expenses covered in case of layoffs, accident or sickness. After that contribute to an RRSP for long term savings, and let it grow tax-deferred until you retire. That’s why they are called Registered Retirement Savings Plans.

If you don’t know where to start, find a mentor in the community or sit down with a trusted financial advisor and get some pointers on where to start. Set up a regular automatic monthly withdrawal from your bank account into a TFSA or RRSP plan. That way, when it’s gone out of your account you can’t spend it on something else!

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