By Derek Sankey, Postmedia News October 5, 2010
When Laura Parsons’s son, a heavy-duty mechanic, graduated with student debt like so many of his post-secondary peers, he also wanted to get into home ownership. Realizing the financial burden, he found a creative solution.
Over two years, he put money that would have gone to pay student loans into an RRSP for home ownership, which triggered a rebate that paid off half his student loan.
He put $8,000 into the RRSP and received back $4,600.
“It’s smart use of debt and understanding all the programs out there,” says Parsons.
If it’s not managed well, everyone faces the potentially crushing grip of debt.
Parsons’s son, perhaps, had one advantage: His mother is a manager for BMO Financial Group in Calgary.
Canadians are living with rising levels of debt, but there’s good debt and bad debt.
How you deal with it, financial planners say, will either allow you to move forward with your finances or run you into roadblocks.
Fifty-one per cent of Canadians say they are focusing on reducing their debt over the next year. Meanwhile, 39 per cent plan to spend less, according to the RBC Canadian Consumer Outlook Index.
“It’s important that Canadians feel confident and understand that managing debt is crucial to their financial success,” Andrea Bolger, a senior vice-president in personal financing products for RBC, said in the report.
Most Canadians’ largest source of debt is their mortgage, and recent talk of a housing bubble has led to some fear in the market. But Parsons says that fear is unfounded because Canadian borrowing rules and regulations are vastly different than those in the U.S. Parsons cited a recent Canada Mortgage and Housing Corp. article that argues the housing market is stable in Canada.
“We’re nowhere near the U.S. rules that caused so many foreclosures,” Parsons says. “That didn’t exist in Canada.”
Debt needs to be actively managed, according to Calgary financial planner Debbie Ehrstien, with RBC Wealth Management.
“People really need to analyze what kind of debt they’re carrying and [determine] if it makes sense,” says Ehrstien.
Active debt is debt on which interest rate payments and other expenses associated with the debt are tax deductible, such as borrowing to invest.
Passive debt, such as credit card debt, is non-deductible and the borrower shoulders the entire cost.
Moving forward with any financial plan requires consumers to deal with their debt. Pay off high-interest debt first, understand the true cost of each kind of debt — the terms and the interest rates — and manage debt by consulting with planners and using online tools to find ways to pay it down in the most cost-effective way, says Ehrstien.
Eighty-three per cent of Canadians who develop a comprehensive financial plan feel in control of their finances, she adds.
“Most people are starting to slow down enough to ask those key questions [and] utilize the cheaper debt to pay out the more expensive debt,” says Parsons.
The Financial Planning Standards Council has launched Financial Planning Week this week, during which certified financial planners will go into the community and give “financial planning health checkups” in various community venues to raise awareness about debt management.
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