Effects of COVID-19 on Canadians’ personal finances could be severe. But now might be opportune to make tough decisions to reset crucial lifestyle choices that led to massive debt build-up since the Great Recession.
The federal government stepped up and is providing relief to workers and businesses to cushion the impact of job and income losses. Banks are deferring loans and mortgage payments. And some landlords deferred rent. These positive moves will help many people and businesses, but Canadians’ starting financial situation is fragile.
COVID-19 Could Push Folks to Bankruptcy
In January 2019, almost half of Canadians surveyed said they were $200 away from bankruptcy. Besides, 45 per cent of those surveyed said they would need to go deeper into debt to pay their living and family expenses. And in a recent survey, more than one million Canadians said they were on the verge of bankruptcy.
Canadians are among the most indebted people in the developed world. The compound annual growth rate (CAGR) of household debt to disposable income (after tax income) ratio prior to the Great Recession (2007) to quarter three 2019 was 2% – rising from $1.45 to $1.77 debt to $1.00 income. For every one dollar of after tax income, the average household owed $1.45 and $1.77. Meanwhile, Americans reduced average household debt over the same period, from $1.38 to $1.02 debt to $1.00 income.
The CAGR of average Canadian household spending between 2009 and 2017, the latest figures available from Statistics Canada, was 2.1%. Housing and transportation’s CAGR was 3% each during that time. In both periods, housing, taxes, transportation, and food accounted for 64% of total spending. Heath care expenses remained at 3% going from $2,000 to $2,500 over the same period.
Per capita household income rose by a CAGR of 2.5% between 2007 and 2016, about the same as inflation.
The debt service ratio, debt as a percentage of disposable income, is more realistic to assess the probability of debt repayment. American’s ratio fell from 13% in 2007 to 10% at the end of 2019. Canadians’ ratio in 2019 remained at 2007 record high level of 14.9%.
I pray you find these guides helpful to navigate today’s unprecedented situation:
- Prepare a budget for the next three to six months. Understand that a budget is not a constraining tool, but a freeing device. It’s your best estimate of likely expenses in a future period to meet particular goals. You control it. It must never control you. If you are married, you and your spouse need to be on the same page to benefit.
- Remember, deferred loan repayments will be due in a few months, so include repayments in your budget and try to set aside those funds.
- If workable, pay down your high cost consumer debts.
- If you have an emergency or capital fund, do not use it unless you apply the affordability index.
- Don’t be afraid to seek help from your church or trusted advisers.
I am grateful to those on the front lines keeping us safe. Now that we know who are essential in our society, I pray we will respect and compensate them well, now and when we get past this stage.