Many Canadians are inundated with debt through their mortgage, lines of credit, or personal and credit card debts. Many Canadians also live paycheque to paycheque, with minimal savings or investments, and have no idea how to get off the tread mill. And yet many are making a solid income. So why aren’t more Canadians investing?
Here are the reasons I usually hear why people don’t invest:
- I have a mortgage (or rent) so I can’t afford to invest.
- I have a defined pension plan, so I’ll be okay in retirement.
- I have lots of debt, so I can’t invest right now.
- It’s too late for me to start investing.
- Investing is too complicated and I don’t understand it.
Mortgage payment and housing costs such as rent and utilities are fixed expenses. These can easily account for half of a family’s net income or more. There is no getting around that one, and here in Vancouver for example, rent is not cheap. Add on food and other costs for your family, and that’s another big chunk off of anyone’s income. If you live far away from work you will need a car to commute or face 3 to 5 hours of commuting per day, and that’s also a huge chunk of income down the drain. Start adding all these expenses up and there isn’t much room left for investing. It’s no wonder many live beyond their means and use debt to make the difference.
The Debt Dilemma
It’s the third point mentioned above that is key. By far, the number one reason Canadians are possibly not investing is because of their debt loads, and reduced cash flow from servicing those debts. In my book review of Crushing Debt, David Trahair pointed out that Low interest rates have led to easy credit, and that most Canadians are in over their heads. According to Trahair, by the end of 2010, the average Canadian had some $25,709 in consumer debt – excluding mortgage debt (Crushing Debt, pg.77).
As award winning author Andrew Hallam pointed out in his bestselling book, Millionaire Teacher, it’s not entirely people’s fault they are in debt and don’t invest. They don’t get the financial education they deserve in high school, the training they need for financial security and stability. The investment industry has made investing seem so complicated, that people don’t even know where to begin. On top of that we live in a material and consumption oriented society where credit is easy, and spending is encouraged. Many have simply resigned to the fact they carry a mortgage and have consumer debt, and the cycle continues.
The Problem with Paying Down Debt
Most people do make an honest effort to eliminate their consumer debts at some point, making a committed budget to pay $200 or $300 per month or more on their credit cards. Many even get consolidation loans or personal loans with the best of intentions. The main problem is people continue to use their credit cards so the balance never gets paid off. The 14% to 19% interest rates keep compounding, and people continue to get behind. Many people also don’t have a secured line of credit, to reduce their interest payments.
However in Crushing Debt, Trahair points out that credit cards are the entry point, but lines of credit are the real problem (Crushing Debt, pg.78). As Trahair points out, the strategy of paying down debt with a lower interest line of credit sounds like a good idea, but it shields the real problem – spending beyond your means. He goes on to add that using a line of credit leaves you in worse financial shape, because it allows you, and even encourages you to increase your debt level (Crushing Debt, pg.79).
Your first goal should before investing should be to eliminate all of your credit card and consumer debt. That means (1) putting your credit cards away in a safety deposit box, so you don’t keep using them, (2) making a commitment to pay off all your credit card debt, and in addition (3) paying off your line of credit. It may even take you two to three years to get ahead, but it will be well worth it. You will have paid down your consumer debts and have a big weight taken off your shoulders. Once you have your consumer debt paid down, investing for your future will make a lot more sense!
Reader’s what’s your take? Do you have consumer and credit card debt you are working to pay down? Have you been able to start investing and get ahead?