Rising level of personal debt disturbing

According to Statistics Canada, 10,936 personal bankruptcies were filed in April, compared with 8,035 one year earlier. On an annual basis, there had been 100,587 personal bankruptcies declared in the 12 months ending in April, up 23.2 per cent from the 12-month period ending in April 2008.

Interestingly, business bankruptcies actually fell 6.2 per cent over the same period. Is there a lesson in that?

Some economists and observers credit the quick and pre-emptive actions by businesses, who anticipated the recession and resulting slowdown in their revenues. Many cut expenses or laid off employees before they were pushed to the brink. As well -- and perhaps most relevant to individuals -- Canadian business debt levels were extremely low coming into this recession.

That meant that when the credit crunch hit last fall and many companies were unable to borrow -- at the same time as demand for their products was dropping -- many of them had cash reserves to draw upon.

Unfortunately, that situation appears to be the opposite for individual Canadians. Debt levels are at historic highs, savings rates are at historic lows and many people appear unwilling or unable to change their ways, even in the face of our first recession since 1991 and the only one in the living memory of many young adults.

These disturbing facts are contained in a research study conducted by the Certified General Accountants Association of Canada, titled Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy, and published earlier this year.

Here are a few findings that I found particularly concerning:

"ö Canadian households are using debt to fuel consumption, as opposed to acquiring assets.

"ö Borrowing is needed to fund day-to-day living expenses by 58 per cent of those people who have debt.

"ö Of people with debt, 85 per cent of them carry a balance on their credit cards.

"ö 42 per cent of survey respondents said that their debt level was rising, although 79 per cent of indebted Canadians think they can handle the debt and take on more.

"ö At the same time, 65 per cent of respondents feel that debt limits their ability to reach their financial goals.

"ö One-third of respondents commit no money to ongoing savings or investments, and the recession has had no positive impact on savings rates.

"ö One-quarter said they could not handle an unexpected need for $5,000, even with the temporary help of credit cards and lines of credit. One in 10 said they could not handle an unexpected need of $500.

"ö A shocking 78 per cent of respondents said they would not change their spending pattern in order to build up such a financial cushion.

"ö Financial literacy is seen as a big factor and a huge concern, as many people do not understand the effect of carrying debt and the costs of servicing debt.

Taken together, these statistics and the attitudes behind them caused me a lot of concern. No one can feel confident and maximize their enjoyment and productivity in life if they are worried by debt levels and making ends meet. However, the attitudes that have led to this situation appear to not be changing.

There is the political issue of many Canadian families being unable to meet their basic needs on their incomes, and there is the social issue of consumerism overtaking common sense. For example, when was the last time you saw a kid without a cell phone?

I am not sure what the answer is nationally, aside from more money spent on financial literacy. I was pleased to find out lately that the government has appointed some talented and knowledgeable people to a commission on this issue.

One thing I know for sure is that you can let these disturbing statistics shock you into action in your personal situation, and that of your children and grandchildren. Do your best to teach them that delaying instant but temporary gratification from purchases and instead building up a reserve fund and making long-term savings and investments will increase their quality of life dramatically down the road.

Speaking as a parent, good luck with that!

David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc., advising clients with $2 million to $10 million of investment assets. You can e-mail him at dchristianson@wellwest.ca.

Republished from the Winnipeg Free Press print edition June 26, 2009 B14