Survival Guide: Household finance

In the current environment, Canadians need to reduce their household debt and hoard cash.

(Photo: Ann Rosener/Library of Congress)

While the value of your investment portfolio fluctuates wildly amid unstable capital markets, one area where you can create some semblance of security is in our own household finances.

As Bank of Canada governor Mark Carney has repeatedly warned, Canadian household debt is at alarming levels. The first step to depression-proofing your personal finances is paying down that debt. Robert Abboud, a certified financial planner based in Ottawa and author of No Regrets: A Common Sense Guide to Achieving and Affording Your Life Goals, says high-interest-bearing consumer debt should be tackled first. That would seem obvious, but his experience shows Canadians haven’t universally grasped this concept. “I find that people for some reason tend to focus really heavily on their mortgage and putting an extra hundred or two against their mortgage,” says Abboud. Focus on eliminating your monthly credit-card balance first, then other forms of consumer debt such as car loans and lines of credit. An opportunity also may exist to use home equity to bundle high-interest debt at lower rates, he adds.

Canadians should also be hoarding cash to mitigate the effects of a potential layoff. Employment insurance will usually cover only a fraction of your salary, so extra money will come in handy to make ends meet. Advisers have traditionally recommended holding three months’ take-home pay in cash at all times in case of job loss.

And while you are gainfully employed, Abboud says, now is the time to secure a line of credit. “You want to have access to cash if you need to feed yourself,” he says, but prudence must be exercised. It’s not there to score a new flat-screen television. “Don’t use it. Just get it.”

3 smart spending tips

Did we mention that Canadians have a spending problem? Abboud offers a simple word of advice for shopaholics: “Don’t.” But when the wallet does need to come out, spend wisely:

1. Cut the daily indulgences. “Where we all get killed are on the variable expenses,” he says. Avoid the fancy coffees, pricey lunches and lavish expenses on entertainment.

2. Buy a used car. There’s no shame rolling in a two-year-old ride that’s still under warranty. “A car just gets you from point A to point B,” he says.

3. Save to buy. For all your big purchases, try to buy them the way your parents did, by saving up the money (or part of it) first, instead of relying on payment plans that end up raising the real price well above what the sticker said. Set aside money for that kitchen renovation. Evaluate large-scale expenditures honestly. It could be wiser to keep cash in the bank and hold off until the storm clears.