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Jan 28, 2019

Prospering Despite a Low Income or Heavy Levels of Debt

by Kelley Keehn

Kelley KeehnIt was the best of times. For some, the worst of times. What does 2019 hold in store for you?

Since the great global recession of 2008/09, it’s been pretty good times to be had in Canada. The markets and the economy have done reasonably well. Most of us, whether rich, poor or somewhere in the middle, live with daily luxuries like the internet, streaming movies, music, laptops and smart phones. Think of the latter for a moment—our smart phones today are more power than what the President of the United States would have had access to just a couple of short decades ago. Information and knowledge are democratized.

Yet, financially, the outcomes have been somewhat bleak. Despite a historically low interest rate environment over the past three decades, Canadians continue to go into debt, are stressed about money and don’t have the basics handled, like a fully funded emergency account. Some standout findings from several surveys conducted last year by the Financial Planning Standards Council reveal:

•          33% of Canadians would fail the financial stress test—meaning they somewhat or strongly doubt their bank account would withstand a financial emergency, such as a car repair or emergency vet bill.

•          Seniors are facing debt problems too—from credit cards to car loans, 56% of Canadians age 60 and older carry at least one form of debt, with a quarter carrying two or more types of debt.

•          One-in-five Canadians are still working past age 60, including six percent of those 80 and older. The reasons for doing so vary: three-in-ten can’t afford retirement (including 13% who say they’ll never be able to afford it.)

That’s a long list but only a partial one. Too many Canadians are facing burdensome debt or low-income levels that are causing them to feel hopeless or give-up on ever setting a goal for financial freedom.

But there’s always hope, and we’ve weighed in with three of the country’s top experts to bring you the advice that you, or a loved one in your life or at work, may need.

How can low-income people prosper or those that are heavily in debt?

According to Jason Heath, fee-only Certified Financial Planner with Objective Financial Partners Inc., “whether your income is high or low, a key personal finance tenet is to spend less than you earn. When your income is low, you may have fewer variable expenses that you can cut to pay down debt or save, so that makes budgeting and cash flow management is that much more important.”

As the CEO of the non-profit credit counselling organization, Credit Canada, Laurie Campbell and her team’s approach is to start with knowing your numbers. “The way we approach it at Credit Canada is we always start with the budget, which gives us a clear picture of a person’s true financial situation, and then see what we can do from there to make things work. Can we lower housing costs by getting a roommate, renting out your basement or Airbnb-ing? Can we lower your utilities by switching to a cheaper cellphone plan or internet service package? Should you switch providers? Can you lower your insurance costs? Can you stop using credit and only work with cash? Can you switch to a no-fee credit card to lower your debt costs? It’s important to find money that’s already there, and then look at different ways to supplement income.”

Heath wants you to keep in mind that there are two strategies for increasing your net-worth: debt repayment and saving. “Saving and investing may seem sexier but repaying high interest rate debt can be a better “investment” than Registered Retirement Savings Plans (RRSPs) and Tax-free Savings Accounts (TFSAs) anyway, especially if your income is low. Start with your highest interest rate debt first and focus on paying it down.”

Slow and steady often wins the race in life and with your finances. Jane Rooney, Financial Literacy Leader from the office of the Financial Consumer Agency of Canada says that, “in a recent international study in which Canada took part, we learned that -- regardless of how much people earn -- individuals can substantially improve their financial resilience and well-being by regularly saving even small amounts for unexpected expenses.”

It’s expensive being in debt

Sean Cooper, mortgage broker and bestselling author of Burn Your Mortgage doesn’t think most people realize the true cost of their debt or, that they’re “taking an ‘out of sight, out of mind’ approach. Canadians seem to be focused on the minimum payment, instead of the overall cost once interest is factored in. This is a costly mistake.”

The Financial Consumer Agency of Canada (FCAC) has a handy calculator that shows you how much money you’d save in interest by paying off your credit card balance sooner.

For example, if you had a credit card balance of $4,000 (which is the average in Canada), assuming it’s a high rate department store card charging 29% interest, by only paying the minimum payment of $120, it would take you 5 years and 9 months to pay off your card and, a whopping $4,229.79 in interest. That’s over double what was on the card and assuming you didn’t charge one dollar more while you were paying it off.

If you crunched the numbers and found $5 extra dollars a day in addition to your minimum payment, you’d have that debt paid off in 1 year and 7 months, paying $1,012.06 in interest. By only paying few dollars more a day, you would have saved $3,217.73 and 4 years and 2 months of payments. You can see how knowing the details and your options can be motivating and empowering!Kelley Keehn

“It’s funny (but not surprising) that as we get older, we realize the true impact that the interest rate on our debt has on our financial situation,” says Campbell. “Last September, our agency sponsored a Debt Awareness Survey that looked at people’s perspective on their debt. What we found was that there was a definite trend (see table below) where younger adults were more freaked out by the total amount of debt, they owed versus the interest rate, but as we age, it’s that interest rate that really concerns us, because we see just how much it impacts the total amount, we end up owing. The study also found that only two-thirds of Canadians know the total amount of debt they owe.”

Save for the unexpected and learn to budget

Rooney wants you to consider foundational strategies and tools that, “even low-income people should consider using, including making a budget, setting up an emergency savings fund, set savings goals, make a plan to avoid using credit when they’re short of money. Many people who want to make a budget, don’t know where to start. A great place to begin is by using FCAC’s online budget calculator. Once you have a better idea where your money is coming from, and where it’s going, it becomes easier to find savings.”

How can you creatively boost your income to pay off debt and save?

Heath thinks the easiest way to increase your bottom line is to look for dollars you might have left on that table. “Tax benefits are like free money and shouldn’t be ignored. Sometimes, the challenge is finding them. Not everyone can afford to pay an accountant, and not every accountant will know all the available government benefits either. The Government of Canada does have a website (www.canadabenefits.gc.ca) that can be used to find federal or provincial benefits, some of which relate to your tax return, but others of which are government programs.”

Cooper points out knowing about “the advantage of the Working Income Tax Benefit (WITB), investing in an RRSP and TFSA. People just assume it makes sense for everyone to contribute to an RRSP. If you earn under $50,000 a year, generally you’re better off contributing to a TFSA. That way you’re less likely to have government benefits like Guaranteed Income Supplement clawed back in retirement.”

Don’t leave money on the table

“One of the best ways to access the benefits to which you are entitled is to do your taxes”, advises Rooney. “For several years, FCAC has worked closely with the Canada Revenue Agency to promote the Community Volunteer Income Tax Program. Through this program, people with modest incomes can gain access to government benefits and tax refunds, often for the first time.”

“I have had the opportunity to witness these tax clinics first-hand, in Winnipeg and in some remote Indigenous communities on Vancouver Island earlier this year and the numbers tell the story: through CRA’s CVITP tax clinics, last year Canadians received:

•          approximately $200 million in tax refunds, and

•          $1.3 billion in benefit entitlements.

That’s a total of $1.5 billion for Canadians who did their taxes through these clinics!”

 

Kelley Keehn is an award-winning author, personal finance educator and is the Consumer Advocate for the Financial Planning Standards Council (FPSC). She has written nine books on personal finance including Protecting You and Your Money; A Guide to Avoiding Identity Theft and Fraud and A Canadian’s Guide to Money Smart Living. Kelley is the Marilyn Denis show’s personal finance expert, was the host of the W Network’s Burn My Mortgage, sat on the National Steering Committee on Financial Literacy, currently serves on the Financial Consumer Agency of Canada’s Consumer Protection Advisory Committee, the Ontario Securities Commissions’ Seniors Expert Advisory Committee, and is a member of the OECD’s International Network on Financial Education.