CGA Study Finds Canadians Foolish With Money

Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy

Related Information
Media Release
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CGA-Canada shares its views on indebtedness of Canadian households (March 2009)[PDF — 98KB]

Backgrounder
In the winter of 2008, the Certified General Accountants Association of Canada (CGA-Canada) embarked on a second consumer survey on the topic of household debt and consumption in Canada. A similar survey was commissioned by CGA-Canada in the spring of 2007. The purpose of this particular survey seeks to understand the extent to which the economic and financial crisis worsened financial positions of Canadians having already experienced some financial strains. As we have seen, the topic of household debt and consumption is timely, relevant and critical for Canadians to consider. We anticipate that this new report entitled Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy, will be of significant value to the Canadian public.

Key Report Highlights
Increasing debt load
Household debt is at an all-time high reaching $1.3 trillion in 2008 and the escalation of debt is primarily caused by consumption motives rather than asset accumulation.
The three main indicators of household indebtedness (debt-to-income, debt-to-assets and debt-to-net worth ratios) deteriorated significantly in the past two years and particularly during 2008.
Canadian households are financing consumption activity and fuelling gross domestic product growth with unearned money as families increasingly reach for credit to finance day-to-day living expenses.
The majority (58%) of survey respondents with rising debt said that day-to-day living expenses are the main cause for the increasing debt. This was higher than the 52% reported in 2007.
Lines of credit and credit cards account for the largest proportion of consumer debt, with 85% of indebted Canadians reporting that they have outstanding debt on a credit card.
A large proportion of Canadians acknowledged their debt as increasing. The proportion of respondents with rising debt went up from 35% in 2007 to 42% in 2008.
84% (vs. 81% in 2007) of Canadians are concerned that household debt is rising. 21% of Canadians who are in debt say they are in over their heads and can no longer manage their debt load.
Interestingly enough though, 79% of indebted Canadians are still confident that they can either manage their debt well or take on more debt load.
The majority of respondents (65%) felt that debt limits their ability to reach financial goals in at least one of the critical areas of retirement, education, leisure and travel, or financial security in unexpected circumstances.

Lack of savings
One third of Canadians do not commit any resources to savings and deteriorating economic conditions have not yet had the usual effect of encouraging increased savings.
Even with the temporary relief of a credit card or line of credit, one quarter of Canadians would not be able to handle an unforeseen expenditure of $5,000 and 1 in 10 would face difficulty in dealing with $500 unforeseen expense.
The majority (78%) of surveyed said they would not change their saving patterns in order to build or rebuild the financial cushion.
Economic factors
The Canadian economy has been recession free for 17 years before the events of 2008. The most recent recession took place over a 12 month period between April 1990 and March 1991.
Recent data on the job losses and bankruptcies leaves little doubt that the situation of the household sector has worsened.
Canadians, though, perceive their financial condition to be better than it is and many are not aware of how the economic downturn has impacted their financial situation.
Nearly one quarter (24%) of those surveyed did not think that a moderate decrease in housing or stock market, an increase in interest rates, cuts in salary, or reduced access to credit would noticeably affect their financial situation.

Vulnerable Canadian households
Certain socio-economic groups are particularly susceptible to increasing debt. The most vulnerable are the hardest hit – low income, households with children, young adults, the retired.
Canadian families in particular are struggling with increasing debt. Households with one or more children under the age of 18 reported debt as rising more often than those with no children, with 49% reporting their debt had substantially increased.
Respondents with lower income were much more likely to report increasing debt compared to the respondents in other income groups. And, those with low wealth continue to sink into debt and to experience further deteriorating in their net worth positions.
Debt-free households do exist of course and 88% of debt-free respondents lived in one or two-person households and were significantly less likely to have children under the age of 18.

Regional differences
There are regional differences for those carrying household debt.
As many as 56% of British Columbians told us their debt increased compared to the Canadian average of 42%.
Some 30% of residents in the Atlantic Provinces maintained an unchanged debt level compared to 23% of the total respondents who said their debt remained the same.
Debt-free respondents were more likely to be Ontario residents.

Recommendations

Balanced approach
The current level of indebtedness of Canadian households is a highly disturbing matter, particularly given the extent of the recent economic shocks (income shock, assets price shock and interest rate shock) and prospects for improving household financial security are low.
Although CGA-Canada recognizes the importance of consumer spending for business development and for economic growth, a balanced approach to spending, saving and paying down debt may be more of a desirable option than trying to promote consumer spending as a solution for the current economic downturn.
Canadians long-term financial goals should include accumulation of appreciable financial assets, building of a larger more diversified financial cushion and retirement investment. CGA-Canada urges Canadians to consider such savings vehicles as RRSPs and TSFAs.
CGA-Canada believes debt is rightfully a personal decision, however, it is crucial that Canadians be aware of potential risks of increasing individual household debt.
It is important to remember that risk tolerances of financial institutions should not be exercised as a substitute for the judgment of individuals who must discern between the good and bad of being in debt.

Financial literacy
Financial literacy remains an issue – Canadians frequently don’t understand the effect of carrying debt and the costs associated with servicing debt.
Households’ knowledge and skill to understand their own financial circumstances and the motivation to borrow, to spend and to save become crucial to marshalling households’ financial security and wellbeing.
Canadians need to take very seriously the issue of developing their financial capability, that is, improving their knowledge, skills and discipline when making financial decisions.
There is also an opportunity for government and the educational community to help Canadians improve their financial capability.
More needs to be done in educating the public on money management, spending, shopping habits, warning signs of financial difficulties and obtaining and using credit.

Uncommon Sense from Charles Munger

Here is an article (hat tip to Calculated Risk) that I think is worth a good read.

Here is a couple of highlights:

As we look at the current situation, how much of theresponsibility would you lay at the feet of the accounting profession?
I would argue that a majority of the horrors we face would not have happened if the accounting profession developed and enforced better accounting. They are way too liberal in providing the kind of accounting the financial promoters want. They’ve sold out, and they do not even realize that they’ve sold out.

Would you give an example of a particular accounting practice you find problematic?
Take derivative trading with mark-to-market accounting, which degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large
profit from the same trade.

And they can’t both be right. But both of them are following the rules.
Yes, and nobody is even bothered by the folly. It violates the most elemental principles of common sense. And the reasons they do it are: (1) there’s a demand for it from the financial
promoters, (2) fixing the system is hard work, and (3) they are afraid that a sensible fix might create new responsibilities that cause new litigation risks for accountants.

Link to Stanford Law.