What to do about DEBT?

Canadian incomes have barely increased since the 1990s, but prices have definitely increased, so, more and more of our income was spent, while less and less of it was saved. At the same time, more and more families found it irresistible to buy into the housing market that further increased their debt. There is almost no family today that does not carry mortgage, bank loan, line of credit, student loan, credit card debt, or car and other consumer loan debts. Paying back the principals and the interest charges on these loans is an ever increasing and self-perpetuating burden. Canadians in the 35-54 years old age group carry over $131 debt for every $100 of income.

On the average, if you have $100 in your pocket, you probably also owe some lenders another $131!

If you wish to look at how much money you have, that is to say, if you take away your debt from your wealth and you are left with your actual net worth, you will find that this net worth is less than you should have and less then you wish to have, in order to feel financially secure.

The average savings of the 35-64 old age group is $87,000. Is this enough to retire on?

But the fact is that only 58% of Canadians have any long term savings. The rest are without.

This may be the case, while your income is continuous and secure. Should, however, there be any interruption in your income, a lay-off, or an illness, then even the present precarious situation could not be maintained any longer.

What happens to a family's income?

From the Gross Earnings, first, we pay taxes: Gross Earnings (GE) - Taxes(T).

Then, from what is left we pay the Debt Service: GE -T - Debt Service(DS)

Then, we must pay our living expenses: GE - T - DS - Living Expenses(LE)

After having paid all that, what is left might be saved. How much is that? Using the average figures:

GE(100%) - T(35%) - DS(35%) - LE(20%) = Savings (S) 10%

This rule-of-thumb calculation is already not too encouraging: 20% is not really enough for living expenses. It also leaves out any room for "luxuries" such as vacations, an unexpected car repair, or extra lessons for children. In order to improve this dismal outcome, something has to change! But what can change?

Gross income? Can it be increased? It is a difficult and slow process.

Living expenses? As long as prices are rising, and they are rising relentlessly, reducing living expenses is ever less possible.

That leaves Taxes and Debt Service. Can they be reduced?

Yes, they cen be reduced. In fact, they must be reduced in order to save!

By rearranging the family's finances, both can be reduced simultaneously, so there will be more money left for Saving and even for Living Expenses. The way to achieve this, the disparate debts have to be consolidated into a single, low-interest debt instrument and the resulting savings can be invested in a long-term investment account.

This truly helpful and important act, the reorganization of the family's finances, would lead to reduced taxes, lower interest costs, reduced monthly expenses and, most of all, finally some funds available for investing for the Future.

At FALCONAIRE FINANCIAL we consider the Elimination of Debt as one of the best and most important projects we can do for our clients.