Debt

Understand It, Talk About It

Personal:

Personal debt (or credit) is something virtually all of us live with for most of our adult lives.  In fact, it would be very difficult to go through adulthood without multiple personal debts.  Mortgages, auto loans, non-current credit cards, student loans, buy now pay later, business loans, leveraged investments, and more.

At the same time, we mostly treat debt like sex and politics.  We don’t talk about it and as a result risk not properly understanding it.  So, let’s take a run at understanding it a bit better.

Canadians have lived with debt as long as there has been a Canada, and before.  The Debtasized 1 documentary by Doug Hoyes travels from colonial times through to the present.

·         1850’s industrialization brought installment plans for mass produced goods

·         1920’s auto manufacturers started to offer credit with interest charged

·         1940’s and 50’s saw mainstream banks offer mortgages and the founding of CMHC

·         1960’s and 70’s brought government backed student loans

·         1950’s through 2020’s has seen house sizes grow dramatically, larger mortgages to match

·         2020’s car loans are now 7+ year durations, when they were once 3 years

Add to all that credit cards arrived in Canada in the late 1960’s and became mainstream in the 70’s and 80’s.  We are long past the times when mainstream society could get though life on cash and no credit.  Our current mainstream lives on credit to the point that we could not very well live without it.  Our personal buying decisions are too often driven by the size of the monthly payment, not the price of the item purchased.

Government:

Let’s look at the other debt impacting our personal finances – government.  Every tax dollar we pay to the federal, provincial, and municipal governments is being used to pay for A) the services and infrastructure they provide, and B) the principal and interest on debts they carry due to running annual deficits instead of balancing their budgets.  In the plainest language, if governments could balance their budgets, they would not have debt and we would pay less personal tax.

Government deficits and debts have been increasing for decades.  Its 30 years since Canadian governments tackled deficit spending with some austerity to at least reduce their debt payments coming from our taxes.  The ongoing deficits across all government levels are leading to larger portions of our personal taxes going to pay interest instead of health, education, roads, etc.

In summary:

Debt impacts on our personal finances in three big ways:

1.      Personal debt commits our future selves to financial burdens we may not be able to repay

2.      Government debt personally costs us more taxes and/or less services

3.      Personal and government debt cause price inflation1 , causing higher daily living expenses

Those negative impacts need to be weighed against the positive short-term impacts gained from buying what we want now.  It’s really all about needs and wants.

That’s where discussion about personal debt should always begin – is it a need or a want?  Since it’s unreasonable to avoid debt altogether, we should all work towards having debt only for what we need rather than what we want.  When voting and communicating with government, always consider their approach to deficit and debt.

I challenge you to discuss debts with you and yours.  It helps us all Be Prepared.  I’ll discuss it with you too if you’d like.  More discussion is better.

1.       Debtasized – How our Reliance on Credit Leads To Price Inflation, by Debt Free in 30

Where to Start

Create your own Financial Strategy

For starters, all the research tells me this is not the end of the world or even some change into a constant decline.  The great fact about cycles is that they pass through lows on their way to the next highs.  We can all look forward to the next highs after the storm passes.

That we are also able to put some broad timeline on the low period (another 5-10 years) enables each of us to put that in the context of our stage in life and that of our families and friends.  Child, adult, parent, grandparent.  What finances in this period look like for us (late 50’s parents) is very different relative to our (late 20’s) children.

We have recently retired and are in a comfortable financial position.  In 10 years, we’ll be well into consuming our retirement finances.  Whereas our boys are in their early years of income earnings.  In 10 years, they will be in their prime earning years with plenty of time ahead of their retirement needs.  Two very different scenarios.  Each of us must Be Prepared for our own scenario.

Invest in yourself:  Spend a few moments to think about what stage of life you and yours will be at in 5-10 years.

What is the probable forecast for this financial storm?  It is likely to be the largest financial upheaval in four generations, likely delivering a large correction in individual access to debt and its cost.  Growing government spending on debt service will change policies (it already is in Canada) affecting taxation, bond values and possibly even the future ability of public pension plans to meet their commitments to us.

Along with the debt correction likely will come increased stock market volatility and increased probability of major downside corrections which could last many years.  The stock market will probably see several years where value stocks generally provide greater safety and return relative to growth-oriented stocks.  Opportunities beyond the stock market may see increased interest from investors who don’t want to live the daily and monthly volatility of the stock market.

Invest in yourself:  Spend a few moments to think about where you stand with debt, taxes, pensions, and investments.

Financial inequality is likely to reverse direction.  In Canada, with net worths being so heavily tied to home equity, this means that somehow, some way outside forces will transfer wealth from those of us that have significant home equity (us) to those that don’t (our children).  Do house prices have to drop 50% or more to deliver housing affordability for all? 1 Some people are choosing to do so voluntarily (through cash gifts or cosigning mortgages) but the outside forces will still have their way – via government taxation or market forces.

Invest in yourself:  Which side of this inequality discussion are you on?   How are you and yours affected by a major housing price correction?

Some very sobering thoughts can come out of this thesis-making process.  Still, wouldn’t you rather know than be blindsided one day when least expecting it?

Remember too, this will last a finite amount of time before the cycle passes back to better financial times.  And, for the engaged investor, the bottom of the cycle will present a once in a lifetime opportunity.

Be Prepared blogs will work their way through the strategy we have implemented, what we are and are not doing, and what input we will give our children, should they ask.  While each of our personal finance journeys is different, hopefully the blog will encourage ongoing investment in our financial futures.

Footnote:

1.      The Loonie Hour podcast Episode 135 with guest Grant Williams