Should debt-reduction top your financial concerns?

Here is the dilemma: There are many Canadians who are going to be in financial trouble if they keep spending more than they are making, but if we all stop spending at once, the economy will fall into recession.

Consumer spending is absolutely necessary to keep Canada's -- and the world's -- economies growing and providing jobs.

However, if you listen to the Governor of the Bank of Canada, the finance minister or some economists, you would think it is more important for individuals to pay down their personal debts. When I look at certain statistics, like 40 per cent of Canadians retiring with debts and a national savings rate of only three per cent, I think there is a lot of reason for concern and immediate action.

My advice is to downplay your obligation to keep the economy going, and radically increase the urgency with which you pay off your personal debts.

It turns out that individual Canadians are saying the same thing about themselves -- paying down debts is their top priority.

This was the result of an annual poll conducted by CIBC and Harris/Decima at year end, which showed that across all ages, 17 per cent of respondents identified "paying down debt" as their top financial priority for 2012, up from 14 per cent in 2011. For people aged 25 to 44, it was the top priority of 23 per cent.

A close second in the poll was the related priority of "managing day-to-day spending and budgeting," at 14 per cent overall, up from 12 per cent in 2011.

Retirement planning was named as top priority by only 11 per cent, down from 13 per cent in 2011. It was the top priority for 20 per cent of people between ages 45 and 65.

Should this also be your concern?

We all know that countries in Europe have a serious debt crisis. Some do not have enough revenue to service their debts and pay back their creditors when their loans (bonds) come due. Of course, that means many lenders will no longer lend to them.

Most people in that situation know they have a problem. Many seek help, but many don't know where to turn. I suggest a non-profit community credit-counselling service, which is available in most large cities. There is a national association which can make referrals, at 1-866-398-5999 or email contact@CreditCounsellingCanada.ca

But what if your situation is more like Canada's, which is running an annual deficit but plans to balance its budget in three years, and enjoys respect from its lenders? How do you determine when debts have become a debt problem?

Clue No. 1 is running an annual cash-flow deficit, with your expenditures exceeding your income. If some of those expenditures are debt-servicing costs, then you have a debt problem. And if you can't service all your debts at today's record low interest rates, then you will have a serious problem when rates go up.

The first step is to take stock of what you have, by listing honestly all of your debts from most expensive (highest interest rate) to least expensive, required payments and projected payoff date.

If you are paying your mortgage down quickly and able to make extra payments on it, and your credit card bills are paid off in full monthly, and any lines of credit you have are usually shrinking rather than growing, then you probably have things under control.

If you want to get serious about debt reduction, consider investing $22 in the new book Debt-Free Forever by Gail Vaz-Oxlade. It provides a great step-by-step guide to tackling both large and small debt issues.

To get a little deeper into how your personality traits affect your financial decisions, consider buying the book $pent by Stephanie Holmes-Winton, which you can order from ThemoneyFinder.ca.

Please don't be like an American politician and bury your head in the sand, or be paralyzed by what seems like an insurmountable task. You can start slowly, and eat the elephant one bite at a time, but definitely start!

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.

David Christianson is a fee-for-service financial planner with Wellington West Total Wealth Management Inc., a Portfolio Manager (Restricted).

dchristianson@wellwest.ca

Republished from the Winnipeg Free Press print edition January 27, 2012 B4