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The Neglected Family Budget
Canadian households are more indebted than they have ever been, but with some simple steps they could do a better job of managing their debt, lowering their interest payments and making more money available for other uses.

What is a key to managing debt?
Creating and sticking to a budget. It’s one of the simpler parts of financial planning but even if people do create a family budget, they often don’t check to ensure that they’re actually spending within the limits they’ve set for themselves. Whether your immediate goal is to reduce your debt, save for retirement, save for education or buy a car, the key is spending within your means. There are going to be months where expenses are much higher and you need to know how you are going to cover those expenses. If it is by borrowing, you have to have the cash flow to pay down that debt after the unexpected expense.

How can people tell if they have too much debt?
There’s not a specific percentage. You can look at how much of your total income is taken up by debt payments and if that seems high to you that’s one indication. You can also check what would happen to your mortgage or debt payment if interest rates were to increase by a significant amount. If you couldn’t absorb those payment increases, that would be a sign you’re carrying too much debt.

How much of a percentage rise should you have a cushion for?
At least two to three percent. Interest rate predictions are very difficult to do over a long period of time. You want to focus on how much interest rates might change in a two- to five-year period.

What should people do to reduce their debt?
Make sure you know where you’re spending your money and see how much money you can allocate to other financial goals. Find out where your money is going and allocate what you can to debt. Canadians tend to carry anywhere from three to five different credit products. Often there’s an opportunity to consolidate some or all of those into something that’s more efficient or at a lower rate. We’re big proponents of setting a debt-reduction goal and tracking it the same way you’d set a target for retirement savings. Check after six to twelve months to see if you’re on track to hit your goal. People should also speak to a financial advisor to incorporate their debt-reduction goal into their broader financial plan.

What’s a good definition of living within your means today?
It comes back to setting that budget. A budget will help you understand what payments you need to make to reduce your debt, what contributions you need to make to your investments, what you need to cover all your expenses and, finally, how much discretionary spending is available to you. And work within that amount. If you’re looking for more discretionary spending, ask a financial professional to look at the types of debt you carry and see if you can reduce your debt expense by consolidating that debt at a lower rate. Without a budget you don’t have any context to know if you’ll be able to meet your debt-reduction goal.

How deeply in debt are Canadians?
We currently have the highest debt-to-income ratio on record, for as long as we’ve been tracking this through Statistics Canada. On average, we have $147 of debt for every $100 of disposable income. One in six retired households still have $100,000 or more in debt.

How precarious a situation are Canadian families in?
It varies widely from household to household. In a lot of cases that debt is applied to productive uses like their house and education for their kids. Not all debt is bad. The major risk is economic events we don’t anticipate that cause really high interest rates, in particular for a younger family that has taken on the maximum debt for which they qualify. They’re going to be stuck with these large inflexible payments. New homeowners may also have unexpected expenses and that’s when people end up having to dip into credit cards or other types of debt, which are sub-optimal because of the interest rate. It creates, for a family, quite a bit of cash-flow stress and pressure, either to cover those unexpected expenses or to contribute to other financial goals.

Where should people go to avoid, manage or reduce debt?

This is part of the core problem. People just aren’t talking to anyone about debt. You look at the 40-somethings and 63 percent of them aren’t talking about debt to anyone, yet a significant portion of them carry a lot of debt. We think the industry can increase the focus on planning to reduce debt, and we believe independent financial advisors may be in the best position to do this.

What is an independent financial advisor?

Advisors who are not employees of a product provider; they’re free to offer financial products from a variety of providers. And because they’re not required to sell the products of any particular organization, they’ll gravitate toward what they feel is the best solution available on the marketplace for a client, as opposed to being tied to a limited product shelf.

What happens to people who don’t manage debt properly?

They’re not able to reach their other financial goals, or not in the time frame they’re looking for. The main impact of carrying too much debt is strain on your cash flow.

Don’t let your money wallow in a low-interest savings account. Put it into a certificate of deposit and watch your savings explode.
Placing your money into a savings account is obviously a great idea. But there are much better things that you can do with your savings than let it collect pennies in interest.

Put your money into a high rate certificate of deposit and reap the benefits of higher interest rates.

A certificate of deposit, or CD is like a savings account in that it is FDIC insured and basically risk free. The difference is that it has a fixed term and a fixed rate. If you withdraw your money before it “matures” you will have to pay a penalty—usually some percentage of your interest.

If you have just been instinctively parking your funds in your bank account for all these years, it’s worth your while to explore the benefits of CDs.

How exactly is a CD different from a regular savings account?

* It’s a one time deposit.
* You can’t get the funds out until the CD matures.
* The rate is locked in at the time that you get the CD.

What are the real benefits of a CD?

* The biggest benefit is a higher rate of return via higher interest rates.
* Your interest rate is locked in and will not fluctuate due to the market.
* If you are an impulse spender and/or will have those funds stashed in an account anyway, it’s a no-brainer.

So, why doesn’t everyone put their money into CDs?

* The number one reason is that a CD locks your money in for a set period of time making it a questionable investment choice if you have an emergency.
* If you close your CD before it matures, you are docked your interest, sometimes even if you haven’t had a chance to earn that interest. This could result in a reduced principal.

Is a CD a good way to grow an emergency fund?
Yes and no. The benefit of an emergency fund is that it is easily available in the case of an emergency. Unless you can absorb the penalty from an early withdrawal, there might be better options for your emergency funds.

Where to get a CD?
As long as the CD that you plan to buy into is FDIC insured, it doesn’t really matter where you get it. Many online sites like mortgageloan.com can tell you what CDs currently have the highest interest rates.

Online sites like .ING are very popular because of their low rates, but it also pays to look at local banks and credit unions as their rates are often competitive.

Overall, CDs are an excellent way to get a better rate of return on money that would otherwise sit in your bank account. Sure, you’re not going to get rich off of a 3-5% interest rate over a 1.5% interest rate, but it’s better than what you would have been getting otherwise.

According to the Mortgage Banker’s Association, 1 out of every 200 homes will from be foreclosed on. Also, every three months, 250,000 New Families Enter Foreclosure earnest.

These are scary figures and a Very Unfortunate situation for the Families Who Will lose Their homes and Their lives have to start over again.

One part of the problem, of course, Is That Families were the resource persons encouraged to live beyond Their means with no-down payment loans and mortgages That They Could not afford.

The other part of the problem Is That members of many households lost jobs and wages and simply couldn’t keep up with mortgage payments Their.

Whatever the reason for the Foreclosure, there are Things That Could have been done both before and after That Would have helped these homeowners to keep Their houses.

Here are three key lessons to be learned from cans That Their Foreclosure experience:

1) Live Within your means.
While this sounds like a simple lesson, it’s one That We all learn again and again. When it comes to mortgages, Lenders are quick to tell us the maximum That We Can afford to borrow. And while this May be a true number, it usually really means “That the maximum you pay without having Enough cans left over for Things like Vacations, retirement, or college tuition for the kids.”

One key to avoiding a situation Nowhere you can not pay your bills is to realistically figure out what your expenses will of some of both right now and in the future. Use those figures to then figure out what the maximum Is That you afford to pay Comfortably cans without neglecting the rest of your life.

And if the idea of ??creating a realistic budget and Responsible scares you, you really need to take stock of your financial situation. It’s better to make your own rules rather Than go through Foreclosure and have a situation dictate what it means to live Within your means.

2) Get a better understanding of the terms of your mortgage.
According to a Freddie Mac / Roper poll, six in ten homeowners wish They understood the terms and details of Their mortgage is better. If you have not read the fine print on your mortgage and do not have an intimate understanding of the details, the chances That earnest you end up getting Surprised down the line are pretty good.

Understanding your mortgage Is not that hard to do. There are many basic guides all over the Internet That cans get you up to speed in A Few hours. And if you really can not bring yourself to do it, at least have a third party financial planner check out your potential mortgage before you sign.

And it goes without saying, if you do not fully understand what an Adjustable Rate Mortgage That is and the risks go along with it, do not get one.

3) If you have issues paying your mortgage, talk to your lender
Lots of people are having trouble paying the WHO Their mortgages do Their Best to Avoid talking to Their lenders. According to a Freddie Mac / Roper poll, oftentimes Their lender Contacting Homeowners Avoid Because They are embarrassed and do not believe That Their help lenders cans.
In reality, your lender more May be Interested in figuring out a payment plan with you than you think.
Lenders and investors typically lose $ 50,000 or more on a single Foreclosure (20-60 cents on the dollar). With a loss like that, you can see That it is not in a lender’s best interest to go through with a Foreclosure. There is more incentive for Them to work something out with you.
More Often Than note, if you let the lender know “ahead” of time, you cans work something out. Borrowers WHO Forge cans Some Kind of repayment plans are 68% less likely, to lose Their homes.
Foreclosure is an awful thing for anyone to go through, but it’s something That cans be avoided if you learn from the homeowners WHO have been Unfortunate Enough to have gone through it.