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Canadians Have An Income Problem, Not A Debt Problem

By Robb Engen | November 6, 2019 |
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Canadians Have An Income Problem, Not A Debt Problem
It’s not hard to find a report about the growing Canadian debt problem. Canadians owe $1.77 for every $1 they make. The average consumer owes $31,400 in installment and auto loans, while borrowing for credit cards and lines of credit average $18,500 per consumer. Finally, there are reports that nearly half of Canadians won’t be able to cover basic living expenses without taking on new debt.

Half of Canadians say they have less than $200 left over at the end of the month, after household bills and debt payments. Canadians’ household savings rate is an abysmal 1.7 percent.

Canadians have a major debt problem! All the warning signs are there. We’re overextended, borrowing to maintain our cost of living, and at risk of insolvency if a recession hits. It’s a crisis!

Our Affordability Problem

Not so fast. It looks to me like Canadians have an income problem, not a debt problem. Or, put a different way, Canadians have an affordability problem.

The median after-tax income for Canadian families is $71,700. Meanwhile, the average house price in Canada is $512,501. That’s an incredible 7x income! For reference, the typical rule of thumb for housing affordability is 2.5x income. That means Canadians should be buying homes worth $179,250.

The discrepancy is even more staggering in B.C. and Ontario:

Avg. house price Median income Affordability
British Columbia $696,115 $72,200 9.64x
Ontario $618,165 $73,700 8.39x

It’s not just housing. Child care costs have risen faster than inflation in nearly two-thirds of cities since 2017. It’s often the single largest household expense after rent or a mortgage. The median cost of child care in Canada’s largest cities hovers around $1,000 per month, with parents in Toronto paying $1,675 per month. The exception is in Quebec, where a universal child care program has been in place for more than two decades (families pay $175 per month for child care in Montreal).

Transportation is the next largest expense for Canadians. On average, we owe $20,000 on our vehicles. The average price of a new vehicle has risen to $37,577. Today, it’s common to see auto loans stretched out over seven or eight years. That helps lower monthly payments slightly, but families are easily paying $500 per month or more on each vehicle (with many two-car families).

Beyond Frivolous Debt

All this to say, it’s no wonder Canadians are struggling to get by from month-to-month. We’re accessing cheap credit, in a lot of cases, to fund basic living expenses or cover emergencies. It’s not like we’re out there buying diamonds and furs.

Furthermore, Scott Terrio, insolvency expert at Hoyes Michalos, says it can be misleading to suggest Canadians are so close to insolvency. He says there is a lot of runway between when someone is in financial trouble and when they file a legal insolvency.

“One can be technically insolvent for months, even years, before they need to consider an actual filing. We regularly have clients tell us that they should have come in to see us 12-24 months earlier than they did. That’s because there are all sorts of ways to stave off a legal insolvency.”

Indeed, there’s only about 55,000 bankruptcies and 75,000 consumer proposals filed by Canadians every year.

“And there are 37 million Canadians, so you do the math,” says Terrio.

It’s An Income Problem

No, we have an income problem that is crippling our ability to save. I’ve seen it firsthand. As a young homeowner, who admittedly got in over his head as a first time buyer, I struggled to pay my mortgage, buy groceries, and service my student loan debt (another issue altogether for young Canadians).

I had a roommate kick-in $400 per month for a while, but when he moved out things went downhill in a hurry. I started using my credit card to cover basic living expenses, but got into real trouble when I maxed that out and had nowhere to turn.

While I did take out a consolidation loan to help manage my debt, the real savior was when I got a promotion at work that came with a $12,000/year salary increase. That extra income gave me the ability to make my consolidation loan payments on time, not have to dip back into credit, and start establishing a savings plan.

Earning extra income, either through a promotion, career change, or side hustle, has been part of my financial success ever since. Without it, I might still be stuck in a debt spiral – living paycheque-to-paycheque with no path to financial freedom.

But not everyone has the ability to earn extra income. Wage growth is barely keeping up with inflation and hasn’t for many years since the global financial crisis. Salaries have been frozen in many industries, especially in the public sector. It’s tough to get ahead when you can’t even count on an annual cost of living adjustment.

Side hustles require time and skill that not everyone has. So we’re left to cut costs at the margins and hope that our pets don’t get sick, our furnace survives another winter, and our tires can last another year. There’s no room for error.

Final thoughts

Reports about our growing debt-to-income ratio and consumer credit are concerning, but should be taken with a grain of salt. As Terrio says, half of Canadians are not on the brink of insolvency. The vast majority of us faithfully repay our mortgages and consider selling our house a last resort (but it is an option).

Personally, I have a higher than average debt to income ratio, simply because I still owe $200,000 on my mortgage. And I don’t have much money left over at the end of the month because I try to optimize my finances so that every dollar of income is allocated towards “something” rather than just sitting in my chequing account.

It’s easy to wag our fingers at indebted Canadians and suggest they quit buying lattes and avocado toast. But in many cases it’s not frivolous expenditures that are getting Canadians into trouble. It’s regular, day-to-day living expenses.

Trimming expenses won’t solve these inherent issues. They require major life decisions, such as taking on a second job, going back to school, moving away from a major city to a more affordable area, paying large child care costs for many years to ensure both parents can stay in the workforce, or getting by on one vehicle instead of two. Not easy decisions.

Weekend Reading: I Quit My Job Edition

By Robb Engen | November 1, 2019 |
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Weekend Reading: I Quit My Job Edition
Well, that escalated quickly! Mere weeks after musing about quitting my day job to become a financially independent entrepreneur, I did just that – handing in my notice last week. I’m going to focus full-time on blogging, freelance writing, and growing my fee-only financial planning service.

My wife and I did a lot of soul searching these past few weeks. We decided that the opportunity to grow this business on my own schedule was just too enticing to pass up. Simply put, it’s a perfect time to bet on myself – especially in the wake of the deep cuts coming to Alberta’s public sector, which will effectively squash any opportunity for growth and advancement in my current career (there’s even talk of a 2 percent salary roll-back).

Couple that with the realization that I’m earning $50/hour working 40+ hours a week, while making close to $250/hour on the side working 12 hours a week, and the choice becomes much more clear.

Besides the obvious appeal of being in charge of my own financial destiny, I’m most excited to spend more time with my wife and kids. I’ve mapped out 4-hour work days, Monday-Friday, leaving afternoons, evenings, and weekends free to be more involved with my kids’ activities and to pursue new hobbies with my wife. We of course also want to continue travelling whenever and wherever possible (without being constrained by a limited number of vacation days at work).

I quit my job, but I still have another month or so at work before taking some much-deserved time off in December. I plan to come out of the gates swinging in January with a new business plan dedicated to providing more educational content on this blog, pursuing new writing opportunities, and taking on more financial planning clients. 2020 is going to be a great year!

In the meantime, I’ll be busy with this transition and answering questions such as:

  • Whether we have enough life and disability insurance now that I’m not covered through my workplace plan
  • Whether to take out a salary or withdraw dividends from our small business to meet our living expenses
  • Whether to leave my pension in the employer plan or take a lump sum and invest it in a LIRA
  • How to set up a health spending account to meet those ongoing needs

Thanks for all of your support – without it I wouldn’t be able to pursue this dream. As always, I’ll keep you posted on my decisions and progress along the way.

This Week’s Recap:

I managed one post here this week – your financial plan is a compass.

Over on Rewards Cards Canada I listed some scary good credit card deals.

From the archives: How a career change improved my life. 10 years ago I moved from the hospitality industry to the public sector to find more work-life balance. It’s hard to believe a decade later I’m making another bold transition to take back control of my time and financial destiny.

Weekend Reading:

Cash back or travel rewards? It’s an ongoing debate, but here’s why the Credit Card Genius team has a strong preference for travel rewards.

An important read from Erica Alini at Global News, who shares three ways the TFSA magic can work against you.

Rob Carrick’s latest article explains why Canada’s biggest bank teaches young clients a lesson on trusting big banks. This topic is extremely frustrating for me (my experience was with TD, not RBC – but still holds true).

Dale Roberts and I are on the same page when it comes to why robo-advisor Justwealth offers the best RESP account in the country.

Here’s a controversial subject that was deftly handled by Highview Financial’s Dan Hallett: Do dividend-paying stocks offer bear market protection?

I’ll also share this post from Dan, which was published last year in Investment Executive. It’s about offering a second opinion to his friends who are getting bad investment advice from their advisors:

“Each advisor was providing good overall service, as demonstrated by the client’s desire in both cases to continue their respective advisory relationships. But both advisors get two big “thumbs down” for not designing more client-friendly solutions.”

If you follow the stock market closely you’ll have undoubtedly heard of the cyclically adjusted price-to-earnings ratio, or CAPE ratio. Nick Magguilli calls it a sCAPEgoat and shares why these valuations get more attention than they deserve.

Million Dollar Journey blogger Frugal Trader explains how he plans to maximize RESP withdrawals for his kids.

Mark Seed shares an excellent interview with Millionaire Teacher Andrew Hallam on reaching financial independence on a teacher’s salary.

On the topic of financial independence, here’s a TED Talk from Lacey Filipich on why you should think about financial independence and mini-retirements:

Here’s part two of The Blunt Bean Counter’s excellent series on what to do when your spouse dies before you. This part deals with taxes.

Finally, here’s an interesting idea out of London’s Gatwick airport. It is testing out new technology to board passengers by individual seat, which could be faster and avoid long lines. That’s assuming everyone’s on-time.

Your Financial Plan Is A Compass

By Robb Engen | October 30, 2019 |
Posted in
Your Financial Plan Is A Compass
It wasn’t that long ago I was buried in debt and living beyond my means. Back then, financial planning was about when my next paycheque would arrive, what bills were due next, and how much I had left to spend at the bar. I remember checking my bank balance after midnight on paydays just to see if I could order another drink or pick-up a late night pizza.

My long-term financial plan was to daydream of a big raise or promotion at my next annual review, or simply bide my time until tax season where I would hopefully earn a juicy refund and pay off my credit card debt. I couldn’t see further ahead than a calendar year at a time.

When I finally had my financial awakening I tracked my spending for the first time, cut expenses to the bone, and took out a consolidation loan to pay off my high-interest credit cards. The loan came with a three-year term, so that became my long-term vision: Make these payments on time, control my spending, don’t take on any new debt, and when the loan is paid off in three years I’ll free-up that monthly payment and direct it towards savings.

And it worked. I made those $800+ payments every month for three years and got out of that debt spiral. I also earned a promotion that came with a decent salary increase. Suddenly, money wasn’t so tight anymore and I could start looking past my next paycheque and towards some long-term savings goals.

Finally, a Financial Plan

My employer had a group RRSP program where it would match 50 percent of contributions, up to 2 percent of my salary. My boss, a great mentor of mine who taught me a lot about personal finance and investing, encouraged me to contribute. I was earning $50,000 back then and so when I put $2,000 into my RRSP, my employer kicked-in $1,000. Add a couple of bonuses over the years and it wasn’t long before I had saved $25,000. I had a retirement portfolio!

Then life threw a curveball. My wife was diagnosed with Multiple Sclerosis and we had to sit down and really map out our priorities. That meant big changes in our lives, starting with the decision to have children right away and that my wife would stay home full-time. My career was also at a crossroads and I needed to earn more money to make this all work.

All of this prompted a career change to the public sector. I negotiated a substantial raise – a $10,000 per year increase from my then $65,000 annual salary – and the job came with other benefits such as more vacation time and less travel. The elusive work-life balance had been unlocked!

I started getting seriously obsessed with my personal finances and realized that financial freedom, and perhaps even early retirement, was actually achievable. It was an incredible feeling, especially given the sorry state of my finances just five years earlier.

The more I read about managing money, saving, and investing, the more I felt I had to share my story and help others get their finances in order. Boomer & Echo was born.

Writing a blog has been a great way to map out my goals and hold myself accountable to achieving them. While my long-term financial goals have changed over the years (remember, I wanted to build a portfolio that spit-out $90,000 per year in dividends, or retire by 40!), it’s the process that has really mattered most.

A Financial Compass To Guide The Way

Retirement, or financial freedom, whatever you want to call it, is just a signpost to stake into the ground miles down the road. Your financial plan is a compass or map to help you get there. The exact details of goals made for the distant future are less important than the positive habits developed throughout the journey.

Imagine you’re in Vancouver and you want to get to Halifax. It doesn’t matter whether you take an airplane, drive a car, or get there by pogo stick; the point is you need to get to Halifax. How long it takes will be measured by how much you earn, save, and spend over the years, plus how many detours you take along the way.

At first, you won’t be able to see your destination. You have to rely on your compass to guide the way. Years, or decades later, as your final destination appears on the horizon, you can adjust course to help you arrive on time or get their sooner. Financially speaking, this could mean ramping up savings in the final years leading up to retirement, matching your mortgage pay-off date to your retirement date, or extending your career by a few years to increase your pension benefits.

Final Thoughts

I prematurely planned for financial freedom by age 40. Then life gets in the way. Kids come along, they’re more expensive than you realize, and your goals get delayed. But what didn’t change was my commitment to the process. I kept saving, paying down debt, trying to control my spending, and looking for ways to earn more. I knew my compass wouldn’t let me down.

Whether I actually reach financial freedom by December 31st, 2024 is less relevant to me than the path I’ve taken to get there.

It’s amazing to see how far I’ve come with my finances in the last 10-15 years. Thankfully, I’m no longer the spendthrift I was in my twenties, living paycheque-to-paycheque and spending beyond my means. Now, financial freedom is on the horizon thanks to my financial plan and the good habits I’ve built over time.