After 18 years of carrying loans, Laura Lawton can't believe she's finally debt-free. That's because the Whitby, Ont., resident has struggled for years to get her financial life in order yet always managed to be in debt because "I like to live on the edge."
But a couple of years ago, a television interview changed all that. Now, Ms. Lawton, 36, has managed to pay off the loan on her 1997 car and save enough money for an annual winter getaway.
Her MasterCard and Visa credit cards are both submerged in ice in her freezer, having been thawed only once when she travelled. She allows herself only $50 a pay cheque to spend on what she calls "frivolous" things, such as buying makeup or going to a movie, and prefers to spend what little is left over on presents for family and friends.
Everything she buys conforms to her budget -- from rent and gas to insurance and food -- and she doesn't spend a penny more than her monthly allotment allows.
"Everybody needs a little discipline," says Ms. Lawton, an associate producer and camera operator at Toronto's 24-hour local news channel CP24. "Now that the car is paid for, I have a lot more money coming back to me so I can pay myself."
While Ms. Lawton may have jumped off the debt treadmill, there are still plenty of Canadians spinning their wheels in the red. Given the volatile economy of the past several years and the barrage of advertisements touting low-interest credit cards, zero per cent financing, and no interest/no payments until 2005, Canadians have fallen more into debt today and are saving less than ever before.
Some are singletons who live alone and worry about how they'll pay their rent and entertainment while others are families paying for children's education, extra-curricular activities and orthodontic work.
The numbers tell the story: According to an Ipsos-Reid poll, one-third of Canadian adults are concerned about managing their current debt levels but only one in nine Canadians (or 12 per cent) polled had made lifestyle or retirement planning changes because of recent market volatility or economic uncertainty.
Statistics Canada says the ratio of consumer credit and mortgage debt to personal disposable income rose to 104.4 per cent in the second quarter of 2003, while the number of personal bankruptcies jumped 8 per cent to 49,730 in the first half of this year from 45,904 a year earlier. CIBC World Markets of Toronto reports that outstanding lines of credit are expanding year-over-year at a rate of close to 25 per cent.
Today's low interest rates may have something to do with it. On the upside, says Lore McGuire, national manager for consumer markets at RBC Royal Bank in Toronto, low interest rates have allowed many Canadians to leverage the equity they've built up in their home (often through secured lending, which carries a lower interest rate than unsecured) and acquire what she calls "cheap credit" to refurnish, buy a vacation property or do whatever else strikes their fancy.
But interest rates are so low they may be tempting people to take on more debt than they should, warns Heather Clarke, director of advanced financial planning at Investors Group in Winnipeg.
They may be able to make their monthly debt payments fairly easily when interest rates are low, she says, "but if interest rates were to take off people would be getting themselves in more of a crunch."
That's why she sometimes urges clients to borrow a bit less than they had originally planned "so there's a cushion there for them should interest rates creep up a little bit."
Laurie Campbell, program manager at Toronto's non-profit Credit Counselling Service, which offers one-on-one in-person or telephone counselling as well as group sessions on debt management, says it's best to try to get a handle on debt well before it turns into a crisis. Unfortunately, most people visit a credit counsellor when they're already in dire straits, having lost their jobs, been evicted or had their car repossessed.
Generally, they've failed to see the many warning signs beforehand, she explains, such as overspending, gambling problems, mortgaging their house "to the hilt" to buy tempting stocks, or dipping into their registered retirement savings plan and then getting hit with a large tax bill.
Some get swayed by housing booms but fail to speculate on how they'll pay the mortgage in five years' time. Many take on huge student loans while in school but aren't able to repay them for years after they graduate.
More than 40,000 people called upon Credit Counselling Service last year and Ms. Campbell expects the number to climb 10 to 20 per cent in 2003.
"When it comes to debt, nobody wants to deal with that reality," she says. "People are eternal optimists. They think that things will turn around: 'Next time will be better, I'll stick really well to my budget now, if I tell the collector I'll pay him $100 he'll get off my back for a while.' There's some denial going on."
The best way to get on track, the experts say, is to start with the obvious: Examine the facts -- how much money is coming in and how much is going out -- and work with a money-matters expert to determine financial goals and strategies.
Ms. Lawton, for example, only realized she was living beyond her means (something she admits to doing all her life) when she finally accounted for every dollar and compared it with her biweekly paycheque. Her financial planner helped her develop realistic goals and get on a strict regime.
"It's mental accounting," says Patricia Lovett-Reid, senior vice-president of TD Waterhouse in Toronto and the guest on Ms. Lawton's business show. "People need to look at their finances in their entirety, particularly [if you're a] family. . . Sometimes you can say: 'I can rob Peter to pay Paul,' but the fact is it's all coming out of the same pot. Somewhere, a goal isn't going to be realized that you once said was important."
Ms. Lovett-Reid urges people to take control of their finances by being personally accountable for their spending and distinguishing between their wants and needs. Goals should be realistic and personal, yet people should be ready to tweak them if life throws a curve.
She warns family members to be open so that they can take charge of their finances together rather than leaving all financial matters to one person. And no matter how much -- or how little -- money a person has, she says, be sure to think like a millionaire by always knowing the numbers and reviewing finances on a regular basis.
Ms. McGuire, the RBC national manager, stresses there's no "vanilla approach" to debt management so solutions should be tailored to an individual's needs. One family's goal might be to balance mortgage payments and save for a spring break vacation, she says, while another might be trying to save for a child's dental work. The financial plan has to reflect that.
Those looking to buy a house should do an initial assessment and perhaps consider making more frequent mortgage payments to reduce interest, she adds, or change the amortization period to pay off more principle with each payment.
For those in a big financial mess, Ms. Campbell suggests acquiring a consolidation loan, securing a line of credit, taking out a second mortgage, setting up a tailored debt-repayment program for a minimal fee to stop or reduce interest or reduce payments, creating a consumer proposal that satisfies all parties or, if all else fails, declaring personal bankruptcy.
Royal Bank of Canada, the Canadian Bankers Association and Industry Canada are among many institutions offering on-line financial calculators to help Canadians develop budgets, figure out mortgage rates, and calculate the best way to save. Credit Counselling Services of Alberta (http://www.creditcounselling.com) and Credit Counselling Society of British Columbia (http://www.nomoredebts.org), among others, offer tips, tricks, useful links and on-line calculators on theirt Web sites, while the national umbrella group Credit Counselling Canada (http://www.creditcounsellingcanada.ca) provides a debt quiz as well as a list of provincial credit counselling agencies.
Ms. Lawton is looking forward to her next sunny destination this winter, made possible by being frugal. While she says she used to spend freely like her mother, her habits now more closely match those of her father, who's comfortably semi-retired because he knows how to save.
"For a long time, I was just spending here and charging there, but I got my butt in gear so my dad's proud of me," she says. "And my boyfriend is envious. He wishes he could be that disciplined, but I'm still working on him."
Test your financial fitness
Do you think you're doing a good job of managing your money? Or do you feel your spending is out of sync with your income? To see what kind of shape you're in, take the Canadian Bankers Association's financial fitness test.
Answer yes or no to the questions below:
Do you usually pay your bills late?
Are you using more and more of your income to pay debts?
Are you paying your bills with money you had planned to use for other things?
Are you paying only the minimum amount on your loans and credit cards every month?
Are you at or over the limit on your credit cards?
Are you borrowing money or using credit cards to pay for things you previously bought with cash?
Are you using your savings to pay bills?
Has a collection agency recently called about overdue bills?
Have you put off visiting the dentist or buying prescriptions because you can't afford them?
If you or your spouse lost your job, would you be in financial trouble immediately?
Are you uncertain exactly how much money you owe?
How Did You Score?
Total the number of "yes" answers to determine your financial fitness.
0: You're the picture of financial health. You're sensible about using credit and take budgeting and saving seriously. But you may still learn some valuable tips in this booklet.
1-2: You're in good shape, but keep an eye on your budget and your financial priorities. Don't let credit use get out of hand and watch impulse spending. Chart how your expenses compare to your income. Pay particular attention to smart credit use.
3-6: You could be headed for financial trouble. You need to get your spending under control immediately. If you don't have a monthly budget, draw one up and follow it. Figure out where you stand financially. Put away your credit cards and cut out all unnecessary spending until you can answer no to all or most of the questions.
7 or more: This is a wake-up call. You are likely in serious financial trouble and should get help. Sit down with budgeting charts and calculate your income and expenses. Once you have an idea where you stand, find a good financial counsellor who will help you identify the problem areas and put together a workable plan to get you financially fit. It may take time, but the pay off is worth it for your peace of mind and financial security.
Excerpted from Canadian Bankers Association's report called "Managing Money: A Guide to Budgeting, Credit Use and Avoiding Money Mishaps"
© The Globe and Mail
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