Tax Time is Nearly Upon Us

With 2019 drawing to a close many people have started to plan financially for the year ahead. To close out 2019 the last thing left to do is file your tax return. The CRA is open to accept efiled returns as early as February 18th which means it’s not too early to get your ducks in a row. You might be wondering whether or not you should consider filing early, and how you can go about doing that.

  • If you’re in a refund position. If you’re like many Canadians you’ll find yourself getting a tax refund on or before April 30th and those funds received back from the government make it into our 2019 financial plans. You can use a calculator as a rough guide to determine if you’re in a refund position which may entice you to get your money back from the government sooner rather than later. Getting your hard earned dollars back in your hands may allow you to pay down debt that’s charging you a high interest rate, lowering the overall amount that you’ll pay over the course of the loan. If you have no debt you might think of investing your refund to earn a higher rate of return setting your futureself up for success.
  • If you have no income. If you find yourself in a position where you haven’t earned any income for the year, you should still aim to file your return as early as possible. You may be entitled to benefits such as the climate change rebate, GST rebate, or other subsidies you weren’t aware of. These are driven off your tax return for the year so it’s important to stay compliant and file your return!

  • If you’re going to owe and can’t pay the entire bill. If you find yourself in a position where you are going to owe the government a lot of money and don’t have the means to pay it all by April 30th, it can be beneficial to file early. This will allow you to set up a payment plan with the government before the due date of April 30th, which may decrease the interest and penalties incurred.

What do you need to do to file early?

Collect your slips & compare to last year

The first step is to ensure you’ve gathered all your forms. Your T4 will be available by the end of February but slips such as T3’s may not be available until the end of March. This being the case it’s important to compare what types of slips you had last year and what you have this year. Barring any large financial changes in what you’ve done over the year, or what you’re invested in you should have most of the same slips as you did the year before, or at the very least an explanation as to why you do not have that slip this year. If you’re unsure if you will be receiving a slip you can call your financial institution to find out. As a double check it’s always a good idea to login to CRA online to see that you’ve included all the slips in your return.

Find a free online software

There are a number of online tax softwares out there when it comes to filing your return. Do your research, depending on the complexity of the return to find the lowest cost alternative. If you have a medium to low complexity return there is no reason you can’t file your taxes yourself. Most online software systems will automatically import any information that has been sent to CRA right into your tax return! Minimizing the amount of work you’ll be required to do.

Ensure you have all your documentation

Regardless of whether or not you’re filing early it’s always important to have the proper documentation to back up your claims. For example, if you’ve claimed a number of donations it will be important to make sure you have those receipts incase the CRA asks. In some situations refunds can be held while they are waiting for you to provide documentation so it’s always best to have it on hand.

Efile and save the trees

The quickest way to have your return processed and your refund on your way to is by efiling your return. Doing so will automatically transmit your information and your return to CRA so that you have the ability to check on the status in realtime. In addition to this your refund will be paid quickly if you set up automatic banking, allowing the CRA to deposit your money right into your bank account!

Happy tax season!

About the Author

Janine Rogan is a personal finance educator and CPA based in Calgary Alberta. She is passionate about sharing her financial knowledge with Canadians to help educate them to make money-smart decisions. Through her website, Youtube channel, and community engagement Janine shares solid financial advice that will make a difference in how you manage your money. Check out JanineRogan.com for more details.

How to Ask for a Raise… and Get It!

These days, being content with your employer is a double-edged sword. On one hand, working for a company you trust and respect can help you feel happier and more fulfilled. At the same time, staying with the same company longer than two years is a great way to earn less than your peers.

That’s why asking for regular raises is key if you plan to stick with your employer long term. In an economy that values growth over loyalty, your boss might need regular reminders of just how valuable you are to the operation. Here’s how to do it.

1. Make Your Case

No company hands out a raise just because you ask for one. Like a lawyer presenting a case, you need to provide solid proof that you’re worth more to the organization than your current salary would suggest.

First, make a list of your recent accomplishments and include specific outcomes. Instead of saying, “I increased our revenue,” say, “I increased our profit by 12% this past quarter, exceeding estimates by 5%.” Bring physical evidence like revenue reports, compliments from clients or feedback from other supervisors.

When I successfully negotiated a bonus at my last job, it was because I showed my boss how much money I had saved them over the course of the year. The implication was clear – if the management wanted me to continue saving them large sums of money, I needed to be compensated in return.

2. Practice Ahead of Time

Like a job interview, asking for a raise is a conversation that requires preparation. Unless you’re an incredibly gifted negotiator, you probably won’t have much success improvising.

Sit down in front of a mirror or with a friend, and outline your reasons. By repeating them ahead of time, you’ll be less likely to misspeak and more confident in your message. Your boss needs to see that you really believe in what you’re asking, so it helps to reinforce that belief ahead of time.

Have a friend give feedback or constructive criticism if possible. Record yourself on your phone or laptop if you can’t find anyone to critique you. Try not to fidget, speak in a timid voice or pitch your voice up at the end of sentences like you’re asking a question. The goal is to sound clear, relaxed and in control.

3. Have a Number in Mind

Asking for a raise isn’t a straightforward exercise. In most cases, you have to be sneaky to get what you want.

When your boss asks how much more money you want, give a number that’s bigger than your actual goal. They will often try to negotiate your number down, so starting with your actual target will just leave you disappointed. If you start high and then negotiate down, you can still end up with the raise you really want.

To find your dream number, compare your role to those at similar companies or estimate how much your company would have to pay a new hire to replace you. Those are the metrics they’ll consider when making a decision.

4. Ask for Other Options

If your company has a tight budget or doesn’t typically offer individual raises, think of something else you can ask for. Some people would settle for a few more paid vacation days or more work-from-home flexibility.

If your boss rejects the idea of a raise outright, having a consolation prize in mind could allow you to leave with something.

About the Author

Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.

How to Prepare for your Next Mortgage

With the spring home buying season fast approaching, anyone committed to buying a home in 2020 needs to start preparing. That can be a pretty daunting task, especially if you’ve never taken out a mortgage before. With all the rules, steps and considerations, buying your first home is like taking a crash course in the real estate industry.

But when you break it down, applying for a mortgage isn’t as complicated as it might first appear. Follow these four steps to prepare your finances and the rest will fall into line.

Evaluate your Credit

Having a good credit score is one of the best ways to qualify for a mortgage with favorable terms. Without solid credit, a bank may charge higher interest rates or deny your application outright.

Check your credit report or your credit score through a free service to see where you stand.

Make sure there are no errors on your report that could disqualify you for a mortgage.

See if there are any red flags from your past that may be disputable. Negative marks generally stay on your credit report between six and seven years, so call the credit bureau if you see any older than that.

Save for a Down Payment

If you haven’t started, now is the time to create a savings plan for your down payment. A down payment acts as proof of trustworthiness to the lender, so it’s a great way to establish yourself as a qualified borrower. You need to put down at least 5% for a mortgage, but a 20% down payment will save you from paying private default insurance.

How much you want to contribute depends on your budget and how soon you want to buy. If you want to purchase a home next year, you might not have time to save the full 20%.

Remember to also save money for closing costs, moving expenses and new furniture. Buying a home for the first time can come with a lot of surprise expenses, so it never hurts to save more than you’ll probably need.

Pay Down Debt

Lenders determine how big of a mortgage to offer based on your income and current debt load. The more you owe, the less you’ll qualify for.

Before buying a home, see if you can pay off high-interest debt or refinance to a lower monthly payment. Reducing your total debt burden will free up your finances and make it easier to qualify for the mortgage you want.

Look at your Budget

Borrowers often use their current rent payment to determine the size of the mortgage they want, but owning a home is far more expensive than renting. On top of the mortgage payment, you have to pay for repairs, maintenance and property taxes. When the water heater breaks, there’s no landlord to step in and handle the repairs.

Assess your budget and see how much wiggle room you have for the unexpected costs. If your monthly spending is already tight, consider getting a house with a monthly payment less than your rent. You can use the remainder to save for future repairs and other home costs.

About the Author

Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.

Take Control of your Finances in 2020

Everyone wants to make big change in the new year. We want to quit smoking, start reading more novels and stop spending so much time on our phones.

But many of us also want to use the new time as an excuse to fix our finances. If you spend most of your days avoiding your bank account balance or refusing to open your credit card bills, then make 2020 the year you change.

Here are the best ways to take control of your finances in 2020:

Start Tracking Your Expenses

The most basic way to control your finances is to track how you spend money, whether it’s a $3 croissant or a $300 TV. Tracking your money will notify you of any trends in your life and help you find your financial weak spots. There are many apps available you can use to track or simply track on a spreadsheet or journal.

After you’ve tracked expenses for a while, you can start a budget or plan to minimize your spending and maximize your savings.

Create a Debt Payoff Plan

If you have any non-mortgage debt, make 2020 the year you finally tackle it. Make a list of what you owe including credit cards, student loans, car loans and personal loans. If you have extra discretionary income, decide how you want to conquer your debt.

There are two debt payoff methods: the snowball and the avalanche. The avalanche means paying off debt in order from highest interest rate to smallest. This strategy will decrease how much you pay in total interest.

The debt snowball method encourages people to make extra payments on the smallest balance first. When you do this, you’ll pay off individual debts faster and gain more momentum.

Shore Up Your Retirement Accounts

Most of us have no idea how much we have in our retirement accounts or how much we need to save. The best action you can take in 2020 is to determine how much is in your retirement accounts and if you need to do more.

List all your retirement accounts including your RRSP and TFSA and their current balances. Note any pensions that you might receive in the future and what you need to qualify for those.

Start Estate Planning

One personal finance topic that people usually ignore is estate planning. No one wants to think about their death or their spouse’s, so they ignore it. Unfortunately, avoiding the problem doesn’t make the process easier.

If you’re married or have a family, now’s the time to create a will. A will can speed up the probate process and prevent any snags when distributing assets.

If you don’t want to hire an estate lawyer, you can use a service like LegalZoom to create a will for a fraction of the price. Make sure to be thorough as possible when creating a will and list all of the assets you have. If possible, go through all your accounts and designate a beneficiary. That will also accelerate probate.

About the Author

Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.

3 Bankruptcy Myths Busted

Have you ever heard of the TV show MythBusters? Well we’re going to do some “myth busting” of our own with respect to bankruptcy.

With household debt near a record level and interest rates on the rise, it should come as no surprise that Canadians are becoming increasingly worried about debt. In an Ipsos survey, one in three Canadians admitted to fearing bankruptcy. Millennials are finding themselves the most concerned. 62% are concerned about paying their bills, while 46% are worried about being pushed into bankruptcy.

With financial literacy lacking in this country, bankruptcy isn’t something most Canadians know very much about. It’s only when you’re on the brink of it that it becomes top of mind. With that in mind, here are three bankruptcy myths busted.

1. Filing for Bankruptcy Erases Your Student Loan Debt

Most employers these days are demanding more education. In our parent’s generation, you could often get by with just a high school diploma, while these days in many fields you need an undergraduate degree at a bare minimum.

Imagine you do everything right: you go to university, get straight A’s and graduate top of your class. The problem is that it’s in a field that’s not in demand. Instead of graduating with a well-paying job waiting for you, you’re left with a crippling level of student debt and no way to pay it off. Don’t think this could happen? It happens more often than you think.

If you were thinking about filing for bankruptcy to forgo paying back your student debt, I hate to break it to you, but you’re out of luck in most cases. While are sometimes when you can get out of paying back your student debt, you’ll need to jump through a lot of hoops to do so.

Similar to death and taxes, repaying your student debt is almost a certainty in life. If your student debt is under seven years old, then you’ll still be on the hook for repaying it even after you file for bankruptcy. The only option may be to apply for the repayment assistance program to lower your payment, but your student debt will still be there, so choose wisely a university program with good job prospects rather than a big mound of student debt waiting at the end.

2. Only Reckless Spenders File for Bankruptcy

Like it or not, there’s a negative stigma with bankruptcy. There’s a general belief out there that only reckless spenders file for bankruptcy, when that couldn’t be further from the truth.

I recently interviewed Ben Le Fort for my Burn Your Mortgage podcast whose parents, who were successful real estate agents, were forced to file for bankruptcy when the 2008 financial crisis happened and they didn’t have any emergency savings.

Sometimes life circumstances can throw you a curveball. You could lose your job, get sick or your partner could suddenly pass away. That’s why it’s so important to have an emergency fund. Three to six months’ living expenses should suffice, depending on the stability of your job. But that’s a lot to save if you don’t have any savings, so start small. Save whatever you can afford – $25 or $50 a week – to start. You’ll have a sizable emergency fund before you know it.

3. The Insolvency Trustee You Go With Doesn’t Matter

When you’re hiring a real estate agent, you wouldn’t hire the first one that you meet (at least I hope not). You’d take the time to interview at least two or three agents before making your final decision. The same holds true with trustees.

Choosing an insolvency trustee is kind of like picking a lawyer. The trustee you end up working with can have a huge impact on how your bankruptcy is handled and how your financial future plays out.

There are over 900 licensed insolvency trustees in Canada. Each one may interpret the Bankruptcy and Insolvency Act differently. Taking the time to interview at least a couple is time well spent. These are just three bankruptcy myths. Thinking about filing for bankruptcy? Speak with one of our experts to see what makes the most sense for you.

How much money is ideal to pay towards Visa #2? Personal finance is very personal, so it depends on your own personal situation. Creating a budget is a good first step to see how much you can comfortably afford to put towards paying off your debts.

Are you motivated to pay off your debts that much sooner? Go on the offense with your finances by bringing in extra income or go on the defense by cutting expenses. For example, if you’re a good photographer, you could be a wedding photographer in your spare time. Likewise, if you’re looking to save money, instead of buying lunch every day at work, you could pack your lunch once or twice a week.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Paying Off Consumer Debt: Debt Avalanche vs. Debt Snowball

Who doesn’t love the holidays? It’s a great time to kick back, relax and enjoy some quality time with those nearest and dearest to you.

While there’s a lot to love about the holidays, something that a lot of us dread is opening our credit card statements in January. Many of us take an “out of sight, out of mind” approach. The problem is that this can lead to something I like to call “bill shock” in January, when we open our credit card statements and find out we ended up spending way more than we intended to spend on the holidays.

Starting the new year in debt isn’t fun, but if you find yourself in this situation, there’s no need to panic. Here are two tried-and-true strategies for paying off your consumer debt.

The Debt Avalanche Way

With the debt avalanche way, you start by paying off the debt that’s costing you the most – the debt that has the highest interest rate. For example, if you have two credit cards, Visa #1 with an 18% interest rate and Visa #2 with a 28% interest rate, using the debt avalanche way, you’d focus on paying off Visa #2. (Don’t forget to keep paying the minimum payment on all your other credit cards, otherwise you could hurt your credit score.)

How much money is ideal to pay towards Visa #2? Personal finance is very personal, so it depends on your own personal situation. Creating a budget is a good first step to see how much you can comfortably afford to put towards paying off your debts.

Are you motivated to pay off your debts that much sooner? Go on the offense with your finances by bringing in extra income or go on the defense by cutting expenses. For example, if you’re a good photographer, you could be a wedding photographer in your spare time. Likewise, if you’re looking to save money, instead of buying lunch every day at work, you could pack your lunch once or twice a week.

The Debt Snowball Way

The second effective way to rid yourself of your debt is the debt snowball way. The debt snowball way is slightly different than the debt avalanche way. Instead of focusing on the debt with the highest interest rate, you’d focus on paying off the debt with the smallest balance. This may be the same credit card as the one with the highest interest rate or it may not be. It really depends.

Using the same example, if Visa #1 has an outstanding balance of $1,000 and Visa #2 has an outstanding balance of $4,000, with the debt snowball way you’d pay off Visa #1 first. (You’d of course still keep making the minimum payments on Visa #2 to keep your credit in good standing.)

I know this may seem counter intuitive and from an interest savings perspective, the debt snowball way doesn’t make sense, but debt repayment isn’t just about dollars and cents. It’s about doing something that motivates you to take action. If the debt snowball way motivates you the most, more power to you.

In the end, there’s no single right way to pay off  consumer debt. I’d encourage you to choose the way that works best for you, setting yourself a goal of when you’d like to pay off your debt and putting a plan in action. By creating a plan and sticking to it, you’ll drastically improve your chances of reaching your goal of debt freedom that much sooner.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

5 Common Credit Myths Busted

Wouldn’t it be great if all Canadians had an excellent understanding of credit scores? Unfortunately, that isn’t the case. With financial literacy lacking in the school system, most of the knowledge we receive about credit scores is secondhand from family and friends. Sometimes that information is right, sometimes it’s not.

Let’s take a look at some of the most common Canadian credit score myths and help dispel them once and for all.

Myth #1: I’ll Hurt My Credit Score by Checking It

This is false in most cases. If you’re checking your own credit score or credit report using a free or paid service, then it won’t affect your credit score. However, if you’re applying for a new credit card and the bank pulls your credit report, that can drag down your credit score.

That’s because there are two main types of credit inquiries, “soft” and “hard” credit inquiries. Soft inquiries like checking your own credit report aren’t noted on your credit history and therefor don’t affect your credit score, while lenders and credit card companies do a hard inquiry, which is tracked on your credit history, to determine how much credit they can offer you.

Too many “hard” inquiries can make it look like you’re shopping around for credit – which can be a red flag for lenders.

This brings us to Myth #2…

Myth #2: All Credit Reports Are The Same

In Canada we have two different credit bureaus: TransUnion and Equifax.

Consumers are typically listed with both, though the information can vary between the two depending on how the companies you do business with report credit and payment histories. You can get your free TransUnion credit report online here and your free Equifax credit report here. Both companies also offer credit monitoring, which can be a good investment if you’re concerned about identity theft or fraud.

Both companies also offer several different views or versions of an individual credit report to businesses. Depending which view a business is using, they may see a different score. This is true for free online credit scores as well, as Marketplace reported in October 2019.

Myth #3: I’ll Improve My Credit Score by Lowering My Credit Limit

Again, this is false in most cases. One important factor that determines your credit score is your credit utilization. That’s a fancy way of saying how much of your available credit you’re using.

A good rule of thumb is to keep your credit utilization below 35%. For example, if you had a credit card with a $10,000, you’d want to keep it below $3,500 (35 percent) at all times. When it gets above 50 percent lenders tend to get nervous that you could be running into financial difficulties.

Giving yourself some breathing room makes sense for most people, but if you’re someone who knows you’ll spend right up to your limit if it’s available, you might be better off with a lower credit limit. Just be aware it’s likely to hold back your credit score – although that’s better than having a large balance on your credit card next month!

Myth #4: I’ll Help My Credit Score by Closing Old Accounts

Do you have a credit card in your wallet that you haven’t used for a while? Your first instinct may be to close it, but did you know that could actually hurt rather than help your credit score? That’s right, if you have a long history of making your payments on time and in full, by closing this credit card, your credit score is likely to take a hit.

You may be wondering why. The reason is simple. The length of credit history is another factor that comes into play with your credit score. When you close an old credit account, you’re shortening the length of your credit history, so it’s best not to do in most cases. The only time it may make sense is if you’re barely using a credit card and it comes with a hefty annual fee. Otherwise, you’re most likely better off keeping it open.

Myth #5: When Does An Old Bill go into “Collections”?

Everyone knows that having an item in collections will have a seriously negative impact on their credit report. But we recently helped a client who had an item in collections – and she didn’t even realize it.

Because the debt was with an internal collections team and hadn’t been transferred to an external agency, she didn’t realize the overdue bill was now considered as “in collections”. But that was what the credit bureau was reporting, and what was holding her back from getting more credit when she needed it.

If you want to learn more about which credit myths might be holding down your credit score, contact one of our credit consultants for a free consultation. They can review your credit report with you and help you find the right tools to grow your score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Why You Should Stress Test Your Own Finances

Interest rates have been low for the better part of a decade, but just because they’re low now, it doesn’t mean they’ll stay low forever. Although it doesn’t look like the Bank of Canada is going to be raising interest rates this year, who’s to say our central bank won’t raise interest rates next year or the following year? The Bank of Canada has raised interest rates five times since mid-2017 and it could very well do it again in the future. How do you prepare your family for possible interest rates hikes? You can do that by stress testing your family’s finances.

Let’s take a closer look at stress testing and why it’s important.

The Mortgage Stress Test

When you hear the term “stress test,” probably the first thing that comes to mind is the mortgage stress test.

The mortgage stress test was introduced on January 1, 2018, to protect homeowners from rising interest rates. Anyone buying a home putting down at least 20 percent must pass the mortgage stress test. The mortgage stress test makes you qualify at a mortgage rate higher than the actual mortgage rate you’re signing up for.

The stress test requires you to qualify at the greater of your mortgage rate plus two percent and the Bank of Canada’s five-year benchmark rate (currently at 5.34 percent). For example, if you’re applying for a mortgage with a rate of 3.39 percent, you need to qualify at 5.39 percent, since 3.39 percent plus 2 percent is higher than 5.34 percent.

The mortgage stress test was mainly brought in to cool the overheated real estate markets in Toronto and Vancouver, as well as protect homeowners from higher mortgage rates when their mortgages come up for renewal. What if mortgage payments were 2 percent higher when your mortgage came up for renewal, could you handle it? That’s the all-important question the mortgage stress test answers.

Applying the Stress Test to Your Other Debts

Although the stress test is a term most often associated with mortgages, it’s a good idea to also apply it to other debt that you’re carrying, especially any debt with a variable interest rate. For any debt with a variable interest rate, you’ll feel the effects right away of an interest rate hike. If interest rates on your line of credit or personal line tied to prime rate were to rise 2 percent, could you handle the new payment? That’s the question you should be asking yourself.

Although you won’t feel the effects right away of an interest rate hike to any of your debt with a fixed interest rate, it’s still important to stress test it, as you could face a higher payment when your term ends and you need to renew.

Taking Stress Testing a Step Further

If you want to take stress testing a step further to ensure you’re prepared if and when higher interest rates arrive, you can pay your debt as if interest rates are already 2 percent higher. By doing that you won’t feel as much of a shock when interest rates eventually rise, not to mention you’ll save lots on interest by paying more than you need to at present interest rate levels.

Need some help with stress testing your own finances? Contact our offices today. Our credit consultants are happy to help.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Canadian Household Debt on the Rise: What Does it All Mean?

It’s hard to pick up a newspaper these days and not see at least one headline about the elevated debt levels in Canada. If you find yourself in consumer debt, at least you’re not alone. But is all the worry really justified? Is Canadian household debt bordering on excessive or is the fear overblown?

Let’s take a closer look at Canada’s household debt situation and what it all means.

The Debt to Income Ratio Hits a New Record

If we focus on just the facts, the facts don’t lie – Canadian household debt is on the rise. Together we owe $2.16 trillion in debt. As a share of GDP, Canada has the dubious honour of having the highest debt load of the G-7 countries.

How did we as Canadians find ourselves in this situation? Low interest rates for the better part of a decade have encouraged Canadians to go on a borrowing binge.

A popular way to measure household debt is the debt to income ratio. The media loves to use this in attention grabbing news headlines. The debt to income ratio looks at your total debt compared to your income. To calculate your own personal figure, add up all your debts – your mortgage, car loan, line of credit, credit card debt and any other debt you might have – and divide it by your net (after tax) annual income. Multiply that figure by 100 and voila, you have your own debt to income ratio!

As of the fourth quarter of 2018, the average Canadian’s debt to income ratio rose to a record 174%, up from 148% a decade ago.

But there’s no guarantee interest rates will stay low forever. The Bank of Canada has already increased interest rates five times since mid-2017. Although it looks like our central bank has taken a pause with respect to further rate increases, if rates were to continue to rise again in the future, many Canadian families who are already feeling the squeeze from higher interest rates, might feel even more of a squeeze if and when higher interest rates arrive.

Is It All Really So Bad?

At first glance Canada’s debt situation looks pretty dire. While the total debt figure and the debt to income ratio may look scary, those are only two measures of household debt. Another important measure is your ability to service your monthly debt.

To calculate this figure, add up how much debt you have each month. This is debt you’d have to pay even if you were on holidays laying on a beach, sipping an umbrella drink. This includes your mortgage, car payments, minimum credit card payments and minimum student loan payments. Then calculate how much your household brings in on a monthly basis. This includes your salary, your spouse’s salary and any extra income you earn on the side.

Take the debt figure and divide it by your income figure and multiply by 100. Ideally, you want to keep this figure below 40 percent, although if you’re living in a city like Toronto or Vancouver where the cost of living is higher, that number could creep as high as 50 percent (although lower is better). Anything over 50 percent and it should raise the alarm bells. In that case, you should look to cut back on your fixed expenses.

The Bottom Line

When I was paying off my house, my debt to income ratio was almost 450 percent and I was fine. That being said, if your debt to income ratio is high and so is your monthly debt figure, then that should be an area of concern.

Confused about these numbers? Contact us today. We’re happy to walk you through them and help you get on the right financial path.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Poll Finds Almost Half of Canadians are $200 Away from Insolvency

January 21st was Blue Monday. In case you’re not familiar with the term, Blue Monday is a name given to the supposed most depressing day of the year. If the sun setting before 5pm and the cold weather outside doesn’t dampen your spirits, getting your holiday credit card statement in the mail might just do it.

To coincide with Blue Monday, insolvency firm MNP released its latest poll with some eye-opening findings.

A Third of Canadians Don’t Make Enough to Cover Bills and Debt Repayment

MNP’s poll found that 46 percent of Canadians are $200 or less away from financial insolvency. That’s up from 40 percent the last quarter. Furthermore, 31 percent of respondents feel that they don’t earn enough to pay the bills and meet debt obligations. That’s up seven percent from last quarter.

With the Bank of Canada raising interest rates five times since mid-2017, Canadians are feeling the pinch. No more so than those living on the financial edge. The poll found that 51 percent of Canadians are feeling financially pinched by higher interest rates. That’s up from 45 percent the previous quarter.

These are some quite startling findings. It shows that Canadians aren’t saving enough for a rainy day. Any unanticipated increase in the cost of living or interest rates could push them over the financial edge.

Canadians Going into Debt to Pay the Bills

Canadians are a resilient bunch. Instead of filing for bankruptcy or a consumer proposal, they’ll use every tool at their proposal to pay for day to day living expenses. One of those tools is going into debt. The poll found that 45 percent of Canadians said they would need to go into debt to pay living and family expenses.

Higher living expenses aren’t the only concerns of Canadians. Further interest rate increases are a worry, too. Half of Canadians say that they would find themselves in financial trouble if interest rates keep rising. That’s up five percent from last quarter.

Higher living costs coupled with higher interest rates could put some Canadians in a real financial bind. The cost of living will most certainly keep rising. The only question is when will interest rates rise. If it ends up being sooner rather than later, it could impose a lot of financial pain on some Canadians.

Protecting Yourself from Higher Interest Rates

If you  have consumer debt, it’s important to come up with a plan of attack. As I mentioned in an earlier article, the debt avalanche and debt snowball methods can both be effective for paying down your debt. Likewise, you might want to look into getting a consolidated loan at a lower overall interest rate. Once you have your debts under control, your next focus should be building an emergency fund. Financial experts recommend saving three to six months’ living expenses in a savings account. Coming up with that much money at once can be tough, so start saving $200 per month or whatever you can afford and you’ll have a full funded emergency fund before you know it.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.