5 Financial Mistakes Canadians Often Make
In 2014, the average debt-to-income ratio for Canadians was $1.63.
That means that for every $1 Canadians earned, they owed $1.63 in debt, whether to banks, credit card companies, auto dealerships, or other lenders.
Ironically, while Americans were at this ratio during the recession and have since improved that number to $1.40, Canadians have been moving backwards. According to Scott Hannah, CEO of the Credit Counselling Society (CSS), this is because the recession “didn’t really change our behaviours,” as Global News reports.
“We’ve gone the opposite way,” explained Hannah. “We’re within a few percentage points of what the U.S. was at during the collapse.”
As the Canadian dollar continues to remain at astonishing lows – currently at 0.80 cents compared to the US dollar – and with prices of oil, one of the country’s main exports, still low, now is as important a time as ever for Canadians to adopt serious money-saving and credit-building habits.
While you’d assume that Canadians would acknowledge this downward trend and make serious efforts to get out of debt once and for all, Hannah claims that some 66% of Canadians actually believe that they’re “financially literate,” despite the fact that they’re spending more than they own, racking up debt, and potentially hurting their credit.
To make matters worse, it seems that Canadians continue to make serious financial mistakes, which, if avoided, would allow them to get back en route to financial success.
Avoid These 5 Financial Mistakes & Get Back on the Path to Financial Freedom
1. Buying A Car You Can’t Afford, Not Even A Little Bit. The results are in, and the latest car-buying trend in Canada is certainly not a good one. Thanks to risky car loans promoted by major banks, not to mention 8-year car loans replacing the former standard of five years, Canadians have “shifted preferences” towards more expensive vehicles, reports Moody’s Investor Services. These days, Canadians are buying “more car” for the same monthly payment, but over a much lengthier term. “Low monthly payments facilitated by low interest rates and longer amortization periods are encouraging consumers to purchase more expensive vehicles,” explains Moody’s. Coincidentally, auto loan debt has drastically risen in Canada, nearly doubling to over $120 billion over the last eight years. In both 2013 and 2014, the country also saw record vehicle sales.
If you have poor credit, our specialists at Auto Loan Solutions will advise that you AVOID this trend, and buy a less expensive used car, as interest rates on bad credit car loans are higher. Once you get your credit back into shape, and have paid off your debt, THEN you can consider buying a new car – though we’d still recommend making a thorough budget and following it to the letter. You should remember, however, that cars are not an investment, and begin to depreciate in value the moment you drive it off the lot. If you’re still keen on a flashy new car, at least investigate into which models have the best resale value.
2. Spending More Than You Make/Have. It seems that the average Canadian consumer has gotten fairly accustomed to living with debt, as more and more Canadians rely on credit cards and line of credits to pay their bills if they have nothing left in their bank accounts. Furthermore, many Canadians are adding to their debt because of a lack of willpower or discipline, or simply a keen fondness of flashy new computer gadgets, boutique clothes, and fancy artisanal dinners. However, Jeff Schwartz, executive director of Consolidated Credit Counseling Services of Canada, warns of living this trendy, have-to-buy-everything lifestyle. “Living beyond our means is a one-way street to out-of-control debt,” Schwartz explains. “If you’re spending more than you earn, that means you’re leaning on credit and the interest charges that come with it.”
According to a recent survey for Consolidated Survey, some 35% of Canadians admitted that their largest source of debt was impulse shopping.
3. Adding to Your Credit Card Bill. If at the end of month you can’t pay the total balance on your credit card, then do everything in your power NOT TO USE it until you can pay it off. Credit cards often boast ridiculously high interest rates and are the easiest way for consumers to fall into, or further into, debt. Even if you’re only paying the minimum, it will still add interest to the cost of your purchase. Try out some inexpensive activities, eat more at home, and avoid spending money unless you have to. You’ll thank us later.
4. Not Having A Budget Plan. Before you take out an auto loan, before you take out a mortgage, before you make any major purchase of any kind, you should first make a budget plan, one that’s realistic and factors in exactly how much you make and how much you spend on average. Make sure to include credit card bills, line of credit, groceries, daily expenses, auto loan, etc. You’ll find that if you have a budget plan to consult before making a purchase, you’ll end up cutting down on all luxury costs that would otherwise have added substantially to your debt.
5. Not Saving for Retirement. Nowadays, saving for retirement is more of a laughing matter than a serious notion. With Canadians barely able to pay off their debt, let alone save for a house or a car, saving for retirement seems ludicrous – it’s not. Even if you put two dollars a day into a retirement fund that you’ll most certainly appreciate once you do retire, over the course of thirty years that will end up amounting to roughly $22,000. And, if you put it in a TFSA, you’ll also be earning interest, as opposed to paying interest like you normally would.
But, of course, you should definitely aim higher than $2 a day. In fact, according to Hannah, saving ten percent of your earnings isn’t even sufficient. “At minimum, you should set aside 15 per cent [of what you earn], because rates of return are so low these days,” he says.
Avoid these financial mistakes, and you may find yourself out of debt, with a strong credit score, and with money to spare. It all depends on you.
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