Income and Debt – What’s the Right Mix?


By Miles Clyne

The average Canadian is living in an environment where wages are not rising, but personal debt is.  This means for most that their disposable income has fallen. Currently, Canadians have record high indebtedness relative to disposable income. If you think you are feeling the squeeze, you are.

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Low disposable income is also coupled with low interest rates, so even a conservative person who may have little debt will earn very little on their safe savings. This is a very challenging environment that makes it tough to move meaningfully ahead in life. This creates a contradiction for many people if by nature they are conservative savers; they want to take little risk with their savings but given low interest rates they may be compelled to take on more risk when it comes to investing to generate higher returns.

The low interest rate environment also makes it tougher for an aging demographic where higher, more stable income is needed to ensure the long-term benefit of savings.  Add to this the aggressive trend away from defined benefit plans to defined contribution plans for workers which puts far more onus on good investment choices. Good investment choices in hindsight are often more defined by luck than skill as well. So even good judgment is only part of the equation.

Is there a reasonable solution to the income/debt crisis facing Canadians and people in many other countries? It’s going to be very hard for rates to rise until there is a solution to our debt problems. It looks like we are in a period of stagnation and low interest rates for some time.  There are even early rumblings out of the US that by 2020 they will be starting to cut interest rates again; lower rates may follow in Canada. Not great news for GIC investors, but good news for current bond holders.

There are a few things to consider.  Today’s low interest rates are not a new phenomenon, we have been here before for extended periods. What is clearly abnormal or the anomaly is where rates got to in the 70s and 80s.  After that, bond investors got very comfortable with steady gains on top of their income for about 30 years as rates fell.  Make no mistake, this was a gift compared to the prior 30 years where bond holders were punished by rising rates. What are the next 30 years offering us?

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I commented that the fix starts with the debt. The debt is a problem at both the government and individual level. The government and individuals are in the same boat, too little income and too much debt.

As individuals, we have the right to live our life the way we want, without causing harm to others. However sometimes we harm ourselves without knowing it. Debt has its place; financing long term deprecating assets should be used very sparingly. Do you know someone who may be paying off a car they have long since sold, a TV that is on its last legs or anything else that will go to zero value and still be owed money on?

There are two solutions that we have control over.  We get to choose our financial behaviour by voting yes or no to almost every financial transaction we make in our life. We also get to educate ourselves on the governments and vote for those we believe will create a better future as opposed to those buying our votes with empty unreasonable promises.

Rates are low and maybe going lower. You can either borrow more or pay off your debt sooner, your call.  Our governments are getting deeper and deeper into debt, we can vote for those which have the most prudent approach to the future or not.  Spend both your time and vote wisely.