Are Canadians too optimistic about paying down debt?

A new poll on behalf of BDO Canada has found that many Canadians think they will pay down debt and increase their net worth in 2016. In fact, 49 per cent believe their debt will be lower by the end of the year, while 44 per cent think their net worth will be higher. But if you turn on the news, you’ll find that oil prices, stocks and the Canadian dollar are lower, while food prices and mortgage rates are higher. Does the country have reason for such optimism right now?

Not if you listen to the pundits. One global investment firm has already told investors to “sell everything”while another predicts the loonie will drop to a record low of 59 cents this year. There is also some speculation that the Bank of Canada could cut interest rates again this week—a move that might encourage Canadians to take on more debt, instead of paying it off. And yet, against this backdrop, most of the major banks, from RBC to TD to CIBC, have raised some of their mortgage rates this month.

This could be bad news for many Canadians, as the BDO poll revealed that several would struggle with an increase in their monthly debt payments. If their debt payments went up by $100 a month, 29 per cent said they’d experience difficulty—that number rises to 62 per cent after a modest monthly increase of $300. And with grocery bills rising on items from Canadian beef and pork to imported fruits and vegetables, other expenses than debt could be putting more pressure on Canadian budgets.

This is why it is important to review and update your budget regularly. Just like the government revises its economic forecast based on the price of oil, your budget should reflect the changing costs of household items—it’s best to review it on a monthly basis. And if you do have a variable rate mortgage, you’ll want to use an online debt calculator to determine how much a rate increase would affect your debt payments.

The importance of an emergency fund for unexpected life events

While saving for retirement and paying down debt should both be included in your monthly budget, there is another item that some might overlook: saving for emergencies. Another key finding from the BDO poll showed that many life events would challenge Canadians financially. Leading the way were long-term injury or illness, which would affect 70 per cent of respondents, and personal or family member job loss, affecting 63 per cent. It’s also worth noting that 53 per cent of Canadians said their financial stability would be affected by retirement, since nearly half of Canadians retire sooner than they expect.

Without an emergency fund, many Canadians could see their debt increase substantially as they rely on credit to bridge the gap. And as the poll clearly illustrates, many of us could not afford an increase in debt payments right now. That’s why saving for emergencies should also be a high priority, along with paying down debt in 2016. While only 24 per cent of Canadians said they made a financial resolution for the new year, 79 per cent of those who did resolved to save more. For the rest of us, these early-year economic events should serve as a signal to focus on your finances in 2016.

Did you make a financial resolution for New Year’s? Join the conversation on Twitter using the hashtags #BDOdebthelp #LetsTalkDebt