How Interest Charges Can Change Your Mind About DebtJan 23, 2018
This year, you have an opportunity to change the way you think about interest charges, and change your finances for the better. The more you learn to hate the interest you pay on consumer debt, the less consumer debt you’ll have.
Rethinking your borrowing behaviour and spending habits can reshape your finances, and change how you live this year and the years to come.
Make debt a four letter word again
While not all Canadians are comfortable with being in debt, the truth is, a lot of Canadians are in debt. Here are a few numbers from the June 2017 report from credit report agency TransUnion:
- The average Canadian mortgage: almost $200,000
- The average Canadian’s non-mortgage debt: about $22,000
- The average credit card debt: $2,840 — 23.7 million Canadians have at least one credit card.
- The average amount owed on a vehicle: $19,087; number of auto loans in Canada: 3.3 million
- The fastest growing category of debt: installment loans (short-term, high-interest loans for large purchases) — 6.4 million Canadians had an installment loan last year, owing an average of $20,466
It’s true that some debt, like a mortgage or student loans, can carry value in most circumstances.
But, people often accept that big debt is necessary for purchases like vehicles, renovations, travel and entertainment. Even everyday spending can lead to a lot of debt and high interest charges, unless you keep track.
In many cases, taking on debt doesn’t add enough value to the borrower’s lifestyle or future to justify the interest charges.
Looking for motivation? Check out Preet Banerjee’s terrific Ted-X talk on the jaw-dropping effect that interest charges can have on your finances.
Take a closer look at how you accumulate debt
Do you keep a monthly balance on your credit card(s) for discretionary spending? If you look around your home, you’ll probably find more than a few items that, in retrospect, you wish you hadn’t purchased — like rarely used fitness equipment or never-worn clothing. And the same goes for the spending you no longer see — like restaurant meals or last year’s vacation.
And what about long-term debt, like a mortgage? If you’re entering the housing market, ask yourself, how much mortgage debt am I willing and able to take on?
New mortgage rules mean mortgage applicants must now qualify for the current interest rate plus two percentage points. Potential home buyers will need to think twice about the amount they’re going to borrow, and how much house they can truly afford to buy.
These mortgage rules are more restrictive, but they may also be a blessing in disguise for first-time home buyers. Millennials thinking of buying a home have different considerations than previous generations. Fewer well-paying employment opportunities and higher costs of living can make taking on a large mortgage risky, leading to increased debt to cover basic living costs more likely.
The more restrictive mortgage rules can reduce or eliminate the risk of taking on too much mortgage debt.
Before you take on debt, think about what you want
Be critical about how you spend your hard-earned money. If you want to avoid high interest charges and the risks that come with borrowing money, start by thinking and spending intentionally.
It’s helpful to create some personal goals. The more you know about yourself, and what you want (the kind of living situation, retirement, heaps of savings for a rainy day, freedom to travel or entertain, etc.), the more intentionally you’ll manage your money.
Consider Danielle Kubes’ blog on paying yourself first. It can help you buck borrowing, eliminate your consumer debt, and spend intentionally.
Pause before you purchase
You know how hard you work for every dollar. Before you borrow to buy something, consider how much that purchase will really cost you. Be honest with yourself. How long will it take you to pay off the debt? How much debt will this add to your total debt load?
This online debt calculator can help you figure out whether the item is worth what you’re spending.
Keep your plans and goals in sight and in mind, and you’ll be more likely to spend and save with intention and safeguard your money. When you achieve your goals and purchase your vehicle, or home, or investments, you’ll value them all the more.
Purchasing and spending less often, without borrowing to do it, means you won’t be over-purchasing, cluttering your life, or devaluing your belongings or efforts. If you have one vehicle you paid for in cash, for instance, you’ll probably value it highly, and take very good care of it.
So, it goes like this: learn to hate interest charges, spend in cash whenever you can, spend with intention, value your purchases, avoid debt, and increase your financial security.
Debt doesn’t always have to be a given. This year, change how you think about the value of your money and your time. Spend with intention on the goals that are important to you. As a result, you can pay off your debt and increase your security. Once you start avoiding those interest charges, the sky’s the limit.