‘Reality check’: Top tips to tame household debt


Jennifer Ferreira, CTV News 

February 16, 2022  – While the Bank of Canada’s trendsetting interest rate target remains at just 0.25 per cent, Canadians have been told to expect the cost of borrowing to rise soon.

Any interest rate hike will undoubtedly put more pressure on Canadians who have already accumulated a significant amount of debt, said Kelly Ho, a certified financial planner with DLD Financial Group Ltd. based in Vancouver.

“For things like mortgage and car payments, if families have maxed out their borrowing capabilities and they’re barely making it, obviously any type of rate increase will be devastating for the household cash flow,” she told CTVNews.ca in a phone interview on Feb. 9.

Jason Pereira is a senior financial consultant with Woodgate Financial Inc. based in Toronto, and the president of the Financial Planning Association of Canada. He says people with variable-rate mortgages are especially vulnerable to growing interest rates, as well those who have already racked up a significant amount of credit card debt.

“If there are successive increases, then it will basically increase the monthly payments and it will cause them difficulty in terms of less cash flow,” he told CTVNews.ca on Feb. 10 in a phone interview. “Bottom line is, if you’re someone who’s living paycheque-to-paycheque and barely getting by on debt, this is not good news for you in any way, shape or form.”

A new report released by MNP Ltd. shows that Canadians are reporting record-low confidence levels when it comes to their personal finance and ability to pay off debt. According to the MNP Consumer Debt Index calculated for December, 43 per cent of Canadians were concerned about their current level of debt, an increase of five points compared to the previous survey conducted in September. Meanwhile, 55 per cent of Canadians were confident in their ability to comfortably cover their living expenses in 2022, a drop of five points compared to the survey prior.

For anyone whose finances are seriously impacted by interest rate hikes, Pereira said it’s crucial to find ways to stop living on the razor’s edge budget-wise.

“If a one per cent change in interest rates is going to put you in a situation where you have difficulty feeding yourself, you’re already too close to the edge,” he said. “You have to proactively take steps [to] cut back on expenditure.”

Pereira, Ho and other industry experts share their top tips for managing household debt:

1. Evaluate existing spending habits

An important first step in managing household debt involves taking a look at current spending habits to find opportunities to save. Part of this involves identifying your fixed expenses, Ho said.

“You really need to know what the non-negotiables are,” she said. “What are those expenses that flow out where you absolutely have no choice?”

Examples include mortgage, rent or any bills associated with housing, as well as transportation-related expenses such as car maintenance or insurance, and even retirement savings, she said. These are all payments that need to be prioritized.

It’s also key to evaluate net income on a monthly basis and determine how much of that is actually going towards these mandatory payments. This could lead to some important revelations about how money is really being spent, said Ho, and how to redirect cash flow if necessary.

“For those who are in dire situations, unfortunately, sometimes it’s a bit of a reality check,” said Ho.

2. Develop a cash-flow plan

According to Ho, most people struggle with controlling discretionary expenses – in other words, spending on things they can live without. While this typically involves travel, entertainment, clothing and even take-out meals, each person will have their own definition of what’s considered discretionary, and how much money should be spent on such purchases.

Instead of telling her clients how to spend their money, Ho said she will work with them to develop a cash-flow plan that involves weekly spending limits on items such as food and clothes. Plans should be based on income and financial goals specific to each person, she said.

“If you spend with no limits, if you don’t have that number on a weekly basis of what you can actually afford to spend without jeopardizing your ability to pay for those non-negotiables, is that going to break your situation?” she said. “Unfortunately, there are a lot of people who don’t think that way.”

Ultimately, deciding what to keep and what to cut is a personal decision, Pereira said, that should be based on individual preferences and values. For some, purchasing a cup of coffee in the morning may seem like a waste of money. For others, it’s a valuable investment that helps them get through the day. These are all things that should be taken into consideration when developing a cash-flow plan, he said.

“You have to decide for yourself what is not important to you, what you’re happy to live without,” he said. “And hold yourself to it because the alternative is just putting yourself in a really bad place of financial difficulty.”

3. Consider getting rid of your credit card (or storing it in the freezer)

For those who struggle to pay off their credit card balance every month, Greg Pollock, president and CEO of Advocis, the Financial Advisor’s Association of Canada, says it might be a good idea to swap the credit card for a debit card.

“The interest rates on credit cards are exorbitant,” he told CTVNews.ca in a phone interview on Feb. 9. “So if you’re paying interest on your credit card, I think it’s a very good idea to get rid of your credit cards.”

It’s important to note that quitting credit cards can impact a person’s credit score and their ability to borrow down the road, said Ho. Instead of cancelling the card outright, Randolph Taylor, an accredited financial counsellor with Credit Canada Debt Solutions, suggests sticking it in the freezer to avoid temptation.

“Reducing the ability or the access that someone has to incur debt is always a good thing,” he said in a phone interview with CTVNews.ca on Feb. 10. “That can be a good tool to ensure that no further purchases are made.”

Instead, Ho will recommend that her clients use a reloadable prepaid credit card for daily expenses. Similar to gift cards, these cards can be preloaded with certain amounts of money that align with weekly spending limits, helping people stay on track, she said.

4. Aim to pay your bills on time

If possible, it is critical that people pay their bills on time to avoid late fees and building up unnecessary debt, said Pollock.

“Generally speaking, people should pay off their debts as they come in,” he said.

Pereira also recommends looking into the possibility of scheduling mortgage and other debt payments. Often due around the same time each month, accounting for these payments in advance can help with organization and budgeting, he said.

Discipline is also key.

“Scheduling your savings and debt payments goes a long way in taking away the [spending] capacity you have available to you,” he said. “Knowing that I can’t spend more than what’s in my account, that’s a form of discipline… you don’t have to go to the extent of having to sit down and budget every last thing you’re going to spend.”

5. Look into consolidating your debt

Oftentimes, the best option for effectively managing debt involves consolidating it, said Pereira.

“Too often, people will have a car loan here, they’ll have a mortgage here, they’ll have a line of credit here, they’ve got some of their loans somewhere else, and a credit card balance,” he said. “They would be better off using a home equity line of credit to pay off all the non-mortgage assets.”

A form of refinancing, debt consolidation involves taking out a single loan to pay off a number of other, smaller loans, usually with more favourable payment terms. Finding ways to refinance debt at a lower interest rate can help save money in the long run, Pereira said.

The key is to not make matters worse by continuing with high levels of spending.

“If you’re making it worse, it’s just going to buy you a little bit more time to dig yourself a deeper hole,” he said.

6. Think about a savings plan

While each person’s financial circumstance is unique, creating a savings fund will help provide some level of security in the future and help manage any debt incurred down the road, said Pollock. A great place to start is by setting aside 10 per cent of net income.

“You’re beginning to build some assets that you can then use to invest where you want to invest, whether it’s in a TFSA, whether it’s in an RRSP, whether it’s in other investments,” he said.

To better manage day-to-day expenses in case of emergency, creating a personal rainy day fund is worth considering as well, Pollock said. The rule of thumb is to set aside enough money to cover six months’ worth of fixed expenses for any unexpected events, such as losing a job or suffering an injury that requires taking time off work.

7. Understand that financial plans will change over time

When developing a financial plan, it’s crucial to remain flexible, said Pollock. No one knows what will happen next year, next month or even tomorrow, so financial plans should constantly be re-evaluated and adapt to current situations and needs as they arise, he said.

“If folks think you develop a financial plan and you got this magic thing now that you just kind of hang on to and it’s going to solve all of your problems, that’s just not the case,” he said. “You need to revisit this on a very regular basis, meaning semi-annually or annually, and readjust it based upon current circumstances.

“There’s no one-size-fits-all.”

8. Look into a financial adviser

For those really struggling to get their household debt under control, working with a third party can be helpful in re-examining your spending, said Pollock.

Along with discussing income goals and expenses, financial planners can also offer advice on options to resolve debt, Taylor said, whether that involves consolidation or refinancing a property.

“We go through everything to put a person in an informed position to make the best choice,” he said.

Finally, having access to a financial planner can also encourage people to avoid being so lax with their spending habits, Ho said.

“What a certified financial planner is supposed to do is educate people not to max out their borrowing capabilities and really look at their entire situation to [determine] whether they can withstand an interest rate increase,” she said. “When you don’t have that accountability piece, who are you accountable to, really?”