By Doug Hoyes, Founder and Trustee, Hoyes, Michalos & Associates
Editor’s note: This article was originally published on March 22, 2015 and was updated on March 21, 2016.
Debt: A Fact of Life
Unfortunately, debt is a fact of life for most Canadians; as many as two-thirds of us hold some form of debt. While some debts can actually be beneficial — such as mortgages and car payments — others, such as high-interest credit cards and payday loans, pose a much greater risk to consumers.
You may like to think that you have a handle on your finances, but it’s all too easy to make a few poor decisions that will lead you down a path of debt that will be difficult to return from. By recognizing the five most common behaviours that cause debt problems, you’ll be much better equipped to stay financially healthy.
Behaviour #1: Not living within your means.
Yes, this is perhaps one of the most obvious financial mistakes you can make. It’s also one of the most common. Credit cards in particular encourage us to spend more money than we actually make, whether it’s out of an effort to stay on top of bills or simply overindulging without giving enough thought to our finances. A budget is key to helping you spend only what you have — and nothing more.
Behaviour #2: Looking too far ahead in the future.
Thinking ahead is a good thing. It’s smart to have specific plans and goals for your family, home, and finances. However, you can take this idea to an unnecessary extreme. Just because you want to have a big family one day doesn’t mean you should buy a gigantic five-bedroom house now. And just because you expect to get a promotion in the next year doesn’t mean you should buy a car you can’t afford. Don’t rely on future earnings to pay off debts you have today.
Behaviour #3: Falling for the minimum payment myth.
More than 90 percent of Canadians have at least one credit card, and many make the mistake of paying only the minimum payment each month. As a result, the debt they carry grows each month due to interest charges. They may be making their payments on time, but they’re far from debt sound. The only solution is to pay off all credit card balances in full each month.
Behaviour #4: Not considering the total purchase price.
Another similar mistake is purchasing something, such as a car, based on the monthly payments rather than the total purchase price. While the monthly payments may seem manageable, it’s important to look at the total price to determine if it’s truly something you can afford in the long run.
Behaviour #5: Not having any savings.
Sometimes the unexpected happens in life — surprise medical bills, house repairs, or vet expenses. If you’re not prepared, you could turn to credit out of desperation and quickly find yourself spiraling into a dangerous debt cycle. That’s why it’s so important to have good insurance as well as an emergency fund for handling unforeseen events. In the same vein, putting aside some funds for investments can help you avoid financial problems in the future.
Do any of the above apply to you? There is Hope!
If you have fallen into any of the above scenarios, there may be help available. If you own a home, for example, with established equity, you can refinance your mortgage to obtain the financing you need to consolidate your debts. If this doesn't describe you, contact us for more information about your options. It's not too late if you act soon!