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