Boxed in by debt?

June 21, 2011

Canadians have long been smug in their knowledge that although we might be borrowing more than ever to pay for massive mortgages, we are nowhere near as bad as our American neighbours.

But a Statistics Canada report released Monday shows that the ratio of household credit market debt, which includes mortgages, consumer credit and loans, to disposable income reached 147.3 per cent in the first quarter of this year, surpassing the revised 146.2 per cent mark in the fourth quarter of 2010. The agency noted that mortgage debt rose, driven by stable borrowing costs as well as higher housing resale and renovation activities.

The increase led Douglas Porter, deputy chief economist at BMO Nesbitt Burns, to warn that Canadian debt ratios are now "leaving their U.S. counterparts in the rear-view mirror, despite the repeated exhortations by domestic policymakers to rein in borrowing."

So it seems timely that on Tuesday, the Bank of Nova Scotia released a report from Let the Saving Begin, a program that it hopes will encourage Canadians to get back on track with their saving habits.

Last summer, the bank recruited television personality Valerie Pringle to embark on a cross-country tour as an ambassador for Let the Saving Begin. Her conversations led her to believe that Canadians realize they are not saving enough and that they genuinely want to do better.

"Talking about money is often considered taboo...," Ms. Pringle said, although it is one of the most important conversations Canadians should have. "Talking about our finances is the first step to making saving a reality and a priority."

In the wake of her cross-country tour, Ms. Pringle issued these mostly common-sense principles designed to help Canadians save:

- Save automatically Use a rewards card or with each paycheque, set up an automatic transfer into a savings or investment account.

- Invest for your future Establish a five-year financial plan and learn the basic language of investing.

- Borrow to get ahead, not fall behind Take years off your mortgage by doing small things like changing your payment frequency or increasing your mortgage payments. Cut the interest on all your borrowing by looking at the interest rates on the things you owe. For instance, you could move your balance from a higher interest store credit card to a lower interest credit card.

A growing body of evidence points to disturbingly low levels of financial literacy among Canadians, with women generally scoring lower than men. Many of the big Canadian banks have embarked on campaigns designed to improve the financial literacy skills of Canadians.

Last week, a report found that Canadian household debt has hit a troubling $1.5-trillion. If household debt were distributed evenly across all Canadians, a two-child household would owe an estimated $176,461, including mortgage costs, according to the Certified General Accountants Association of Canada.

Roma Luciw is the web editor of the Globe Investor personal finance site and writes for the Home Cents blog.

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