Debt Management Series: How Debt Affects Wealth Management

It’s financial literacy month and Canadians need help with debt management-badly.  Over half (52 per cent) of Canadians are only $200 away from insolvency according to a poll of 1,500 Canadians by insolvency consultancy MNP this spring.  It’s a highly valued service that tax and financial advisors can offer.

Just how much debt are we in?  Plenty.  This issue has been bubbling under the surface for some time. In fact, Canada tops the list as far as personal debt is concerned. Our consumer-debt-to-financial-assets ratio is the highest among the G7 countries (National Post January 2016).

Earlier this fall, Stats Canada also confirmed that household debt to disposable income was at an unprecedented high:  Canadians had 1.68 dollars in debt for each dollar of disposable income.  In fact, total household credit market debt, which is comprised of consumer credit, mortgage and non-mortgage loans reached $2077.2 billion in the second quarter of the year.

Certainly there are services for those who are having trouble making payments or those who must go to the extreme and file for bankruptcy. But even Canadians not in such dire financial straits are voicing their concerns about their finances, and survey after survey tells us that paying down debt is at the top of the list.

With so few resources to make debt and cash flow part of the financial plan, it is no wonder that so many feel overwhelmed by debt.

Most accept that young people are the sector of the population carrying most of the burden, but recent statistics paint a very different picture, especially for retirees over the past five years:

• 60 percent of Canadians are retiring in debt and 19 percent of retired Canadians are accruing new debt.  Those aged 50-59 are taking on an alarming amount of debt. (CIBC poll, Spring 2012)
• Canadians over the age of 65 have the highest insolvency and bankruptcy rates in the country. (CIBC poll, Spring 2012)
• Nearly two in three Canadians (65 percent) believe they have financial habits to improve – and those same habits have Canadians worried. (Ipsos poll, Fall 2015)

Therefore, it is important to consult with a financial advisor at any early stage in life to understand how to plan for a manageable level of debt and a financially healthy retirement.

Tax and financial advisors should also make the discussion of debt management a priority for pre-retirees and their adult children.  It’s an investment in financial literacy that will pay off in spades with a worry free retirement.

This is the first article in our debt management series by Knowledge Bureau Faculty member Marcia Elaschuk, DFA-Bookkeeping Services Specialist^TM. Marcia will be hosting the CE Summit workshop session on Managing Debt Sources in all four cities November 21-28. Walk-up registration is available – visit the CE Summits agenda for more information.

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