Debts are Like Weeds

A short one for today

Dandelion

Bloody Weeds

Debts are so much like Weeds, removing them (one by one) seems like an insurmountable task, yet, if you go at it a little bit at a time, in a shorter period than you thought, they are all gone, but you have to stay diligent or they will continue to dominate everything.

There is your lawn and finance tip for the day, if you want a fitness tip read Debt is Like Fat .

 

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Canadian Family Debt is Increasing

Stats Canada published another one of their interesting long term studies about Canadians, and this one is of particular interest to me (and hopefully you), Study: Changes in Debt and Assets of Canadian Families 1999 to 2012 . The actual full report (which is also an interesting, but longer read) can be found on the Stats Canada Web Site, as well.

The full report outlines the following:


This paper examines changes in debt, assets and net worth among Canadian families with debt over the period 1999 to 2012, by selected family characteristics. It also examines the extent to which two key ratios of indebtedness, the debt-to-income ratio and the debt-to-asset ratio, varied over the period.

  • In 2012, the percentage of Canadian families with debt was 71%, up from 67% in 1999. The median debt held by these families was $60,100, up from $36,700 in 1999 (in 2012 constant dollars).
  • Between 1999 and 2012, median debt and median assets increased for most types of families, but not equally for all categories of families. Median debt, for instance, increased faster among those in the 35-to-44 age group, among couples with children under 18, and among mortgagees.
  • Between 1999 and 2012, the median debt-to-income ratio rose from 0.78 to 1.10, while the median debt-to-asset ratio remained stable, at around 0.25. Families in the 35-to-44 age group witnessed significant increases in both their debt-to-income and debt-to-asset ratios.
  • In 2012, 35% of Canadian families had a debt-to-income ratio above 2.0—meaning that their debt was at least twice the level of their annual after-tax income. This compared with 23% of Canadian families in 1999.
  • In 2012, 14% of families had consumer debt (i.e., debt other than mortgage debt) that was larger than their annual after-tax family income. In comparison, 8% were facing the same situation in 1999.

So the long and the short of it is yes Canadians are carrying more debt, their assets are worth more, but as usual you need to look a little closer at some of the data to see the more disturbing findings in the report (that confirm things we all keep suspecting, younger Canadians with young families (with kids) are starting to drown and the ocean continues to rise). I put that last bullet in bold to emphasize the growing consumer debt “balloon” that is inflating without control and when interest rates go up, wait for the big bang.

Debt to asset and Debt to Disposable Income ratio

Debt and Asset as a Ratio

As you can see the value of assets has gone up as much as debt, however comparing it to disposable income is a little more worrisome.

Percentage of families with debt, 1999 and 2012
Table summary
This table displays the results of Percentage of families with debt 1999 and 2012, calculated using percentage units of measure (appearing as column headers).
1999 2012
percentage
Families with debt 67.3 71.1
Age of major income earner  
15 to 34 79.6 78.6
35 to 44 80.0 84.7
45 to 54 76.4 80.7
55 to 64 60.9 70.3
65 and over 27.4 42.5

This table has some more worrisome number showing that folks 65 and over “with debt” has increased significantly. Seniors carrying debt loads? Why?

Table 2
Median debt and assets, families with debt, 1999 and 2012
Table summary
This table displays the results of Median debt and assets Median debt, Change, Median assets, 1999, 2012 and 1999 to 2012, calculated using 2012 dollars units of measure (appearing as column headers).
Median debt Change Median assets Change
1999 2012 1999 to 2012 1999 2012 1999 to 2012

2012 dollars

All

36,700

60,100

23,400

225,400

405,200

179,800

Age of major
income
earner
 
15 to 34 24,400 39,300 14,900 63,600 92,700 29,100
35 to 44 63,000 142,600 79,600 234,000 413,800 179,800
45 to 54 50,500 87,800 37,300 355,400 552,700 197,300
55 to 64 26,200 49,300 23,100 404,100 656,800 252,700
65 and over 8,500 18,000 9,500 310,100 484,300 174,200

The age group 35 to 44 has had it’s debt load double, and while it’s assets are up, they have not doubled. Is this a “debt bubble” that is going to go boom if interest rates go up?

So it seems our assets have increased in value (but that does include real estate, which has increased significantly over this period in most Canadian Cities).

Read the report, it is a worrisome read.

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Student Lines of Credit

For my regular readers you will remember that I have a deal with my children, that I will attempt to pay for their first degree, in exchange I will not pay for their wedding ceremony, with the proviso that if I am asked to help out on the wedding (which I will do, I am not as heartless as I’d like to think I am), it is my party as well.  A follow on proviso is that they pay for any future degrees (although I will attempt to help out if it is possible).

With this in mind, my middle daughter decided to go to Chiropractic College, and applied for a Student Line of Credit. Most of the big banks, either:

  • Don’t offer very much money which is a problem as Chiropractic College is a very expensive degree
  • Weren’t interested in dealing with her
National Bank of Canada

National Bank of Canada

This led to going to the National Bank of Canada, which does offer a Student Line of Credit family of loans. The amount they will loan depends on what program you are in, and they view Chiropractic College as a “health care professional” program thus they will loan her enough money to cover most of her expenses (mind  you the degree is even more expensive, because she has to “live” in Toronto, which is not cheap). The nice part of their Student Line of Credit is , “…no payback of principal (sic) or interest while you are at school…”, which is useful.

My daughter thought she had set up one of these fine life sucking debt creatures (no I am not going soft on debt, I still hate it), however, she was mistaken. I ended up having to co-sign on her application (so really it’s my student line of credit), and this is why I am not happy (as well).

My daughter has been getting calls from the bank since she had the Line of Credit set up, and the problem kept getting “cleared up” (or more precisely it went away). Finally, this past week, luckily she was home, she got another call, and she went back to the National Bank branch where she set everything up, and she finally got to the heart of the problem, which was, they had not set it up a Student Line of Credit at all, they had set it up as a “regular” line of credit, and they were kind of miffed that she was not paying her minimum payments.

I was not present when all of this silliness transpired, but my daughter worked hard to start straightening the mess up. The young lady she spoke to first, was smart enough to figure out that she was out of her depth, and the  young man (who was lucky enough to be working on a Saturday) she dragged into the mess started to peel this smelly onion of a problem. He was the lucky one to figure out that the “Student Line of Credit” was set up as a regular “Line of Credit” and then realized the Pickle of a Predicament this created.

Evidently someone from “Head Office” will need to clean up the mess created by the  young lady who made the blunder setting things up initially, but the young man from the branch has triggered the Hazardous Debt cleanup team that will work on this problem (I hope).

Why does this all matter to me? First, I am very proud that my daughter dealt with all of this without my intervention. The important point for me, is that whatever Credit Rating penalties that might come out of this blunder, is going to be mine, because I am the co-signer on this debt vehicle, so the National Bank will soon get to enjoy the special treatment I have given TD over the years, stay tuned, this looks like it is going to be an interesting follow up.

The moral of this story? (even though it is not finished yet)?

  • Always follow-up with your bank when you set up a new account with the bank to make sure it is set up correctly. I have had Spousal RRSPs that were set up as regular RRSPs more than once, so follow up every time.
  • Careful what loans you co-sign for, they can end up hurting your credit rating
  • I still hate debt, and now I have another reason to hate debt.

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Financial Daylight Savings

Hopefully you have sprung your clocks ahead (if not, you are really late this morning), and with this in mind, I keep wondering the point of DST?  The best commentary I can find on this odd idea is:

“Only the government would believe that you could cut a foot off the top of a blanket, sew it to the bottom, and have a longer blanket.” -Native American Leader

DST

Daylight Savings Time? What a Crock!

That  sum it up nicely.

That idea, moving around things and then claiming you have more, really is a good commentary on today’s debt riddled lifestyles. You borrow money so you can have more things, and you are thus farther ahead?

I am going to make a finite amount of money in my life, however, I will give a lot of it to someone else so I can have some material things sooner, and thus feel like I have more.  – Big Cajun Man Corollary of Debt

Evidently the Monday after Daylight Savings time there are more accidents, so hopefully you drove carefully as well? I decided to take the day off, just to be safe.

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Debt Limiting Idea

As I have written in the past I have a huge backlog of unfinished ideas, and thanks to a vile chest infection, I am dipping into this odd array of unfinished ideas. This one I think crosses a few lines (i.e. in poor taste), but it does have a point to it.

I was trying to think of how banks might slow down the tsunami of debt that seems to be accumulating with all of these cheap interest rates, that we currently have in Canada, and I have come up with a brilliant† idea, that will never (ever) be implemented (because banks make money if you are in debt, so this fantastic idea is counter to their profit line).

† – Where brilliant could be translated to sarcastic as well

Debt Tatoo

Nifty Looking Ink Eh

The important technological step that is needed is erasable tattoos, which are being developed (well the inks are) as we speak.

Here is the idea, you go into your local banker, and you want to borrow a large sum of money, and your banker offers you the following

Get the word Debtor tattooed on the back of each hand, and you can have the loan for a 25% discount on the current lending rates. When the debt is repaid, the tattoos are removed. However, if you show up with one of these tattoos, you are automatically refused.

There would have to be subclauses about if you tried to alter the tattoo, or hide it in some fashion you’d have to pay a penalty but wouldn’t this be a great idea?

Too harsh? All it really would do is drive folks to alternate lenders, I doubt it would slow many folks down.

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Selective Financial Perception

When I was a kid I really loved visiting the Granby Zoo, but I always hated going into the Simian Pavilion, because the smell was awful. You walked in there and the smell was wretched but after a while you got used to it, and in my mind that meant the smell had gone away. If I’d look closely I would have seen from the looks on the faces of folks entering the smell was still there, I had just learned to live with it.

When I grew up I learned in Psycho 101 about the idea of Selective Perception, where you just decide to ignore something even though it has not actually gone away. An excellent example when I became a parent I thing I gagged the first time I changed one of my daughter’s diapers, but after a while explosive diarrhea didn’t even bother me (i.e. all the way up her back).

Before I bought my first house, I was petrified at how much money a Mortgage was, and how was I ever going to deal with this massive debt? These days, I just look at it, shrug my shoulders and wonder when I became so callous about that large a sum of money? When I was a kid $10 is like $1000 is to me now.

All that debt just piles up doesn't it?

All that debt just piles up doesn’t it?

All of this to say that part of the problem with Debt is we start getting Selective Perception with a great deal of debt.

  • I’ve already spoken about House Mortgage, but that is a monstrous number (hopefully the largest debt you ever carry). Hopefully you didn’t make yourself House Poor.
  • Car Loans are the same thing, paying off a car loan should be a high priority (if you borrowed to buy the vehicle), as the asset is losing value every day, but you get used to it. What’s that you say? You only lease cars? So you just keep paying for cars, every month, and it’s just another thing that you end up forgetting about?
  • Credit Card debt I suspect is the same thing. The first month you are upset that you didn’t have enough money to pay it off, but eventually, you just become resigned that you must pay this, and you don’t think about it any more, and just make the monthly payments.

Just because you can’t smell the Zoo of your debts, doesn’t mean you are not still standing in the middle of the Simian House. Did I miss any other debts that just disappear into your consciousness?

 

 

 

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Debt Won’t Just Disappear

I have had a few folks take exception to my statements in Questions with an Answer: Get Out of Debt, in that they question whether it is more important to incur some debt to build wealth, than worry about growing debt, and if I could figure out how you type a Bronx cheer, I would, but I will simply say bunk!

The exact exchange was:

My response was simply, I would rather owe nothing. Savings of all kind can drop in value very quickly (depending on how it is being held), but debt will never magically decrease in value (and severity) without you doing something about it.

You may own a house worth $400,000 right now, and you have a mortgage that is for $125,000, however, it is not outside the realm of possibilities that the house could (in a very short period of time) be worth less than what you owe on it, then where are you? I have rarely (if ever) heard the opposite where suddenly your mortgage was forgiven and you owed nothing on your house, but your “Wealth” is mercurial.

The ephemeral nature of wealth is sometimes lost on folks, if I own $1,000,000 worth of BCM Enterprises Stocks (as options, which don’t vest for another 6 months) and I owe $160,000 on my mortgage,  my Net Worth is?

Anybody?

– $160,000

Correct! Stock options are worthless until  you see the money from the transaction in your bank account. I had over 10,000 shares of Nortel in options and 1 bright day they were finally worth $300, and then they were worth nothing again (as an obtuse example).

How about if I own a $1.5 Million home in a lovely section of the Beaches in Toronto, and I owe $400,000 on the mortgage, how much am I worth?

Anybody?

– $400,000

Correct Again! OK, that one is going to cause some comments, but, having things that you think are worth something is a wonderful thing, but until somebody pays for it, it is worthless. More likely than not my beautiful cottage in the Beaches (no I don’t live there) will sell for more than $1.5M if I tried to sell it, but maybe not.

One more: I have a Pension that is going to pay me 60% of my salary when I retire, I have $200,000 in my RRSP but I still owe $95,000 on my home, and I have $10,000 worth of other debt (bad gambling debts, let’s say), what is my Net Worth now?

Some might say: $95,000 at least because you have all that lovely RRSP money and that juicy pension, but do I?

If I cash my RRSP in, I am going to get SLAUGHTERED on taxes, and say this heavenly Bull Market we are in goes Bear very quickly, what am I worth? My Net worth would be closer to $0, and then you can figure out what you can valuate your pension however you like (but remember you have to live long enough to enjoy that as well).

All of this to say, that Wealth is Ephemeral, and can disappear like a Fart in the Wind, but DEBT is like an abscessing tooth, until you remove it, it will hurt and it will not go away until you do something about it!

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Questions with the answer, “Get out of Debt”

Let’s make life simple for my return from vacation, and get back to basics, so let’s kind of head towards Jeopardy’s model, and here is the answer that you need to ask a question for:

Get out of Debt

Debt

Working Through Debt Problems

How hard could that be, let’s see how many interesting questions that could have that simple response:

  1. My wife feels that while our relationship is good, she wants us to be much closer, what should I do?
    Get out of debt, that way you don’t argue about money any more, and you can concentrate on the important things in life.
  2. I feel worried all the time, and I have a hard time sleeping these days, how could I fix that?
    Get out of debt, you will then have 1 less thing to worry about. This is the simplest thing in your life to start fixing, so get at it
  3. I never have any money in my wallet, and I am living from pay cheque to pay cheque, which has caused me to be impotent, what should I do?
    Get out of debt, seriously if your money worries are giving you issues with your love life, you really should get the hell out of debt.
  4. I am staying at my in-laws and they are driving me insane because they keep asking me when we are going to move out and have our own place, is there anything I can do?
    Get out of debt, you are living with your in-laws, ’nuff said! Oh and definitely move out if your in-laws live in Debt, Ontario.

Just had to get that one off my chest. Were there any questions that I might have missed?

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