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When it comes to debt and spending, there are mistakes and then there are Mistakes!

Small luxury purchases won’t necessarily derail your long-term financial goals, but consistently living beyond your means, amassing consumer and credit card debt, and not saving for retirement could cripple someone for years to come.

This year, the debt-to-income ratio in Canada clocked in at 1.63.  Meaning for every $1 earned, Canadians owed banks, credit-card companies, auto dealerships and other lenders $1.63 in debt.

1.  Spending more than you make, amassing consumer debt.

Canadians have become increasingly comfortable with debt.  In some cases, this is out of necessity – once the bills are paid, if there is nothing left from a pay check, groceries and other necessities get charged to a credit card.  But in other cases, consumers are spending more than they make.  Jeff Schwartz, executive director of consolidated Credit Counseling Services of Canada says “If you’re spending more that you earn, that means you’re leaning on credit and the interest charges that comes with it!’

2.  Carrying that balance on your credit cards

A CCS survey found that 64% of Canadians who frequently carry credit card balances claim to be highly financially literate.  Paying the minimum will prolong your pay period and add interest to the cost of your purchase.  If you have multiple credit card debts, start by paying off the card with the highest interest rate.

3.  Buying too much car.

The amount of auto loans doled out is growing faster than any other type of loan in Canada because of new financing models.  Ten years ago, car loans typically maxed out at 4 years.  Then they crept up to 5 years.  Today, it’s pretty common to see 7 and 8-year car loans.  And this is creating liability for consumers.

You get a brand new car with an eight-year-loan, trade in that car after four years, so the loan gets rolled into a new one – and now the loan is worth substantially more than the car itself!

4.  Buying too much house.

Whereas older generations managed with a single-car garage and two bathrooms, buyers today are lured by the two-car garage and three+ bathroom home for their family.  The difference, is that older generations were able to pay their mortgages off.  Now people are retiring still holding mortgage debt.  It’s common practice now that home purchasers ask ‘how much can I get’ as opposed to ‘how much can I manage’.

5.  Not having a budget or debt game plan

The first step to getting your finances on track is to think of your family like a business. The first rule of business?  You can’t spend more than comes into the household.  According to Consolidated Credit, the average Canadian family owes an average of $20,759 in debt – without factoring in mortgage debt.  Look at  the numbers and see if you are in a spending deficit or surplus.  Budgets can be liberating –  they put you in control of your finances so you’ll never have to worry about hitting rock bottom.

6.  Not saving for retirement

Too few Canadians are saving for retirement, and many aren’t saving enough.  Saving 10% isn’t sufficient these days.  At minimum, you should set aside 15% (of what you earn), because rates of return are so low these days, says a retirement expert.

A recent poll from BMO found that Canadians between the ages of 45 and64 are falling behind on their savings plans.  The average amount, those polled, want to have saved for retirement is $818,000 – but the amount they had actually saved was just $258,000.   Experts recommend setting up automatic withdrawal plans, so retirement savings automatically come off your pay check on a regular basis.

Original article: www.globalnews.ca

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