CHAPTER 1: Mind over Money
Why do you have debt?
Don’t worry, I’m not looking for a confession. This isn’t about making you feel like a weakling because you drank the proverbial $5 latte this morning instead of a homemade cup of joe. Nor am I under the illusion that sticking religiously to your French press and forsaking takeout guarantees you’ll be able to pay off your credit card balance at the end of the month. I know this from experience. When it comes to food and drink, I have things down to a science. I buy my favourite brew in bulk on Amazon and plan meals a week at a time. And sure, this saves me money. But if the transmission of my 10-year-old car suddenly gave out tomorrow, I’d have to make some tough financial choices (and let’s hope I didn’t just jinx myself with that).
What I’m asking here is this: Do you know why you and I and most other people have so much debt?
It’s not just because of the choices we’ve made or because of our individual circumstances. We live in a world that makes it extremely easy to borrow. I know you didn’t crack open this book for a history lesson, but stick with me for a minute while we speed through the decades — understanding how we got here will help you put your own debt struggles in context. Once we’ve had a close look at the larger forces that shape why and how we borrow, I’ll talk about some simple strategies you can use to fight back, kick your debt, and turbocharge your savings.
Canadians owe more than $2 trillion in household debt. That’s roughly equal to the size of our entire economy. It means that the value of all the mortgages, credit card debt, and other loans we collectively carry is roughly the same as the value of all the goods and services we produce as a country. Measured as a percentage of gross domestic product (GDP), our pile of household debt is one of the biggest in the world. We have the dubious honour of being ahead of both the United States and the United Kingdom.
But living in the red is hardly a uniquely Canadian thing. When you look at how much debt Canadians carry compared to their after-tax income, we don’t come close to leading the pack. The Swiss, Norwegians, and Australians — to name just three — have higher household debt levels.
People didn’t always have this much debt. At the start of 1990, Canadians’ debt was 87 percent of their collective after-tax income. By the end of 2019, it had skyrocketed to 181 percent. Another way to think about that: for every dollar of income we bring home on average, we owe $1.81. And while the relative size of our debt load shrunk immediately after the start of the pandemic, because many of us rushed to save up, it soon started climbing again. So why did we start racking up so much debt? Did someone put something in the water? Did we develop a gene mutation that turned most of us into spend-more-than-you-make zombies?
I won’t pretend to have the full answer. Heck, economists don’t have all the answers, either. But it’s pretty clear that how we got here has a lot to do with low interest rates, high prices, and easy access to credit.
Low Interest Rates
Interest rates were once much, much higher than they are now. Chances are, if you were born in the 1980s or 1990s, the idea of your parents borrowing money at a rate of 18 or 19 percent interest leaves you gobsmacked. I’m an older millennial — I have a husband, a kid, a house, and the aforementioned aging car — and mortgage rates have been in the low single digits for as long as I’ve been aware of what a mortgage is.
Why are rates so low now?
Interest rates started to decline in the 1990s — not just mortgage rates and not just in Canada. It had a lot to do with a number of countries figuring out a new and better way to keep inflation in check.
But let’s rewind the clock a little further. By the late 1970s, high and unpredictable inflation had become a major pain in the neck for everyone. Constantly rising prices forced consumers and companies to waste a lot of time worrying about what they’d be able to afford in the future. Workers demanded higher wages to keep up with the cost of living, and businesses, in turn, had to raise prices so they could pay those higher wages. It wasn’t pretty.