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  • More notes on a bubble and why credit counselling could soon balloon.

    by:
    Laurie Campbell

    These days I’m not the only one sounding off about Canada’s domestic housing bubble, soaring  debts, and a future where a lot of freewheeling folks could suddenly find themselves in need of some credit counselling when the spending party is over. Last month I wrote about dark clouds on the horizon. I addressed “creative” lending practices by some financial institutions that are encouraging people to spend on real estate beyond their means in a market where prices are going through the roof - all of it smacking of what went on in the United States prior to the economic crash of 2008. Then about a week ago, Bank of Canada (BOC) Governor Stephen Poloz echoed my fears saying Canada’s financial system right now is at risk thanks to a combination of factors that include overvalued residential real estate, mounting and unprecedented levels of consumer debt, and growing stresses in the international banking community that influence us here at home.

    This is serious business for families and individuals throughout Canada, particularly those who are throwing caution to the wind on housing they can ill afford, as well as those who are already burdened by what they owe be it in relation to mortgage debt, credit card debt, or personal loans. Aligning with my hunch that the credit counselling we offer at Credit Canada Debt Solutions could soon balloon, the BOC outlined a worrisome, big-picture scenario, which goes:

    •  China’s growing shadow banking system continues to disrupt global financial markets;
    •  Gains since 2008 in world markets are destabilized;
    •  There is a jump in global long-term interest rates;
    •  The ripple effect brings rising interest rates to Canada while at the same time our housing market comes crashing down.

    In such circumstances, a two-fold shock would result with rising unemployment and consumers struggling to pay their debts, the BOC says, though it tempers matters by adding that the risk is not yet approaching a critical level. To me, the mere fact that the BOC makes an effort to mention such an outcome perhaps signals serious 'behind-the scenes’ worries that are being downplayed publicly by financial movers and shakers.

    All of us in Canada ought to realize that our personal finances are being influenced by unstable forces stirring not only within our own borders, but far beyond them. I believe that among consumers already feeling uneasy about their debt, it is time to pull up the bootstraps and take full stock of monthly budgeting and possible negative financial outcomes in the foreseeable future. That could mean getting the jump on a credit and employment crunch by seeking qualified credit counselling and financial coaching services sooner rather than later (Our phone number is 1-800-267-2272 or fill out this form for a FREE debt assessment session). At the very least, families and individuals ought to think about how to prepare for economic trouble with the understanding that no one can say for sure there will be a crash in Canada anywhere on the scale of America’s 2008 debacle. Still, many are watching the canary in the coal mine, and the little feathered fellow appears to be sniffing the faint odour of explosive gas.

    So, how does one prepare for the possibility of sudden, unwelcome economic change?  Well, I’ve kept on file advice provided to the Financial Post not so long ago by wealth management advisor Anil Giga. His tips about how Canadians can get back to the basics of prudence and financial management make plenty of sense.

    Here is his checklist:

    •  “Build up a safety nest of at least six month’s expenses.
    •  “Don’t live within your means, live below your means. The bigger the margin, the more you save.
    •  “Get rid of debt. If you have investment properties, consider selling them as soon as possible.
    •  “If you have a mortgage on your home with a floating rate, consider locking in the rate for between three to five years. Similarly, with lines of credit that you cannot pay off.
    •  “Pay off your higher interest rate debt, such as credit cards, first.
    •  “Look for a secondary source of income to increase your safety net, such as a part-time job or by renting out an eligible basement.
    •  “Expect a lot of volatility in the stock markets. If you have money invested in the markets that you may need soon, you shouldn't be in the market.
    •  “We are entering an age of frugality, so be frugal, but not cheap.
    •  “It would be wise to put off big-ticket purchases and make do with what you have.
    •  “If you are considering selling your home to buy another, make sure yours is sold first or you risk being stuck with two homes and extra debt in an uncertain economy.
    •  “Think twice about quitting your job.
    •  “Reconsider whether you need all the cars you have. Each car has hidden costs.

    I think smart Canadians will do well to heed all of the above advice and moreover will try to think about other ways to save, add to income, as well as protect assets.

    In the meantime, I leave you with a quote from William Wordsworth:

    “Life is divided into three terms - that which was, which is, and which will be. Let us learn from the past to profit by the present, and from the present, to live better in the future.” Amen.

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