After the holidays, many can be burdened down with credit card debt and will make it a goal to pay this and other short-term debt down in the new year.
According to a CIBC poll conducted in late December, paying down debt was once again the top priority in the new year for 28 per cent of Canadians for the seventh straight year.
Alongside this, some troubling facts came forward, presenting the narrative that one-third of those who are taking on this debt are doing so just to cover day-to-day expenses.
“Right now, people are more focused on making rent, paying for groceries and keeping their kids in activities,” Kerry Leckie, managing partner of Leckie and Associates LLP said.
According to the latest data from Statistics Canada, household debt, including mortgages, rose to a record 166.9 per cent of after-tax income in the third quarter, with debt loads rising faster than disposable income.
Though concerning, Leckie had some tips for those looking to save in the new year and explained how once one managed to wrangle the proverbial spending “snowball” in the other direction, things could get moving rather quickly.
“The only way you are going to get that big snowball stopped is by stopping or slowing the spending,” he said.
First, Leckie explained how getting credit cards – which can carry interests rates of around 20 per cent – under control, in an effort to free up some additional cash flow to allow for increased saving.
“If you can get out of that short-term debt…the money you are saving in interest alone… is money in your pocket,” he said.
In regards to savings, Leckie said at times you have to “force it.”
“Put $200 a month aside or whatever you can afford or have an automatic withdrawal into a savings account.”
For this, he recommended taking a look at a tax-free savings account (TFSA) as an alternative option for storing your savings over an everyday account.
“The interest on your money isn’t taxed in the tax-free savings account, so anytime you can make money tax free is a good thing because that is money in your pocket.”
Though interest rates are rather low and the money being generated in any savings account will be low, as savings do grow, it can quickly add up to a substantial amount of money.
He also explained how these accounts can be used on a tax-deferred basis, and though you cannot receive a deduction for it, you will never pay tax on the money gathered by the interest and the input limits renew every year even after a withdrawal.
Leckie recommended using a TFSA to save for big purchases like cars or a down payment on a home.
With registered retirement savings plan (RRSP) purchasing season underway, Leckie said how though these plans are great saving tools, he recommended only using these for long term retirement saving and nothing else.
“RRSPs are a great tool because the money can grow on a tax-deferred basis,” he said.
“If you make a dollar that dollar goes right back into the RRSP and you do not have to give the government their share of it just yet.”
He did however wince at the thought of people withdrawing from their RRSPs or are using it to save for cars or homes, because they “are only allowed so much for a limit in a lifetime.”
“I encourage people to not use the RRSP for anything but their forever retirement money and use the TFSA for those (other) things.”
He also recommended sitting down and taking a line-by-line look at one’s expenses to understand the money going out and by getting a handle on those nickel and dime expenses like internet, cable, groceries and clothes.
“Some people are shocked when they see what they spend on groceries in a month, or clothes in a month,” he said.
“People need to remember to live within their means, if you can’t afford it, then maybe you have to wait for it or save for it, and then it can be a really good feeling when you do save for it and buy.”
Different saving plans will work for different people, and those looking to wrangle in their costs in 2017 should talk to an advisor to devise a plan which works best for them.
The online poll was conducted from Dec. 5 to 6 among 1,507 random Canadians. The margin of error for a poll like is +/- 2.5%, 19 times out of 20.
By Tyler Marr, Lloydminster Meridian Booster