What do we do about our debt load?

Scenario:

Marcie is 38, and a busy mother of three young children. She and her husband Trevor have $100,000 in investments, and a $130,000 mortgage but they seem to be living just cheque to cheque. Ongoing market activity hasn’t helped – and has reduced their investments by about 20%. They’re also carrying a long-standing $20,000 student loan, have $25,000 outstanding on a line of credit loan, and have $15,000 in outstanding balances on two high interest credit cards.

They’d like to focus more on saving for their children’s education, but both are stressed out about the debt load and trying to make ends meet, and they make big impulse purchases every once in a while. They do recognize their erratic saving and spending patterns are contributing to their problems.

Jane Olshewski*, Manager, Financial Planning Programs says:

Sliding into debt is unfortunately very easy – a little here – a little there – and suddenly you’re paying a lot of money every month simply to service payments instead of enjoying your quality of life now or setting aside money for tomorrow. Marcie and Trevor need a debt management plan to get back on financial track.

Jane says debt is often a symptom of a larger problem – perhaps poor communication, unclear goals, or differences between partners – one’s a saver and one’s a spender. As a result, there can be a tendency for debt creep to occur, that is, a recurrence of the same kind of behaviour that got you into debt in the first place. It’s important to get to the bottom of a debt issue, and not just its symptoms – otherwise debt can linger and create even bigger problems down the road. By developing a plan, Marcie and Trevor can better identify and outline their priorities and make better use of their money. It all starts with a detailed Personal Financial Review and understanding their financial life goals.

Once the plan is mapped out, a Consultant would advise that they reduce their highest interest rate “bad debt” first. Consumer debt, especially high cost credit debt, is a real impediment to creating lasting wealth. Debt consolidation and a monthly debt reduction plan will help. Marcie and her husband also need to communicate more openly and frequently about their financial situation and the stress it is causing.

A longer term plan will also be important by identifying a realistic financial strategy for saving towards important life goals, such as their children’s education and their own retirement.

Considerations could include:

  • Establishing an emergency reserve using TFSAs;
  • Protecting their family with life, critical illness and disability insurance;
  • Funding their children’s education with RESPs;
  • Funding their own retirement with RRSPs.

An Investors Group Consultant can provide some additional perspective with a plan that shows Marcie and Trevor how they can achieve these life goals will go a long way to alleviating their stress, and strengthen their resolve to get debt-free and back on track.

Jane Olshewski, BA, CSA, TEP, Life Planning Professional
Manager, Financial Planning Programs

Jane specializes in financial life planning, retirement planning and boomer issues. Jane has many years of experience in pension and trust administration, and is an expert in registered products including RESPs, TFSAs, RRSPs, and RRIFs.

This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.