October 21, 2020
What does affordability mean to you? Has getting out of debt become a struggle? For most of us, at this point in time, the answers to these questions will depend on how our financial situation has been affected by the ongoing COVID-19 pandemic.
What does affordability mean to you? Has getting out of debt become a struggle? For most of us, at this point in time, the answers to these questions will depend on how our financial situation has been affected by the ongoing COVID-19 pandemic.
Our recently released BDO Affordability Index reveals a lot about Canadians’ affordability and debt struggles. This is our third annual Affordability Index.
Our first two affordability surveys revealed how affordable life has been for people in Canada has been over the past two years.
Too many Canadians have been living paycheque to paycheque (over half) and a great number (over a quarter) haven’t been able to afford the basic essentials of life. Debt has been a given for the majority of Canadians, and unmanageable for one-in-four. This year is different.
For Canadians whose financial situation has improved or hasn’t been affected by COVID-19, the affordability news is a bit better. These households are much less likely to be living paycheque-to-paycheque compared to previous years, and much less likely to struggle to pay for their needs. Almost all (nearly nine-in-10 ) say they have enough money to buy what they need.
In stark contrast are Canadians who are finding it difficult to cope because of the pandemic. These people were much more likely to tell us they find it all challenging, from groceries and utilities to housing costs and saving for retirement. In many cases, they were more than twice as likely to struggle as those people whose finances remain unchanged or have improved.
The pandemic has resulted in what economic experts are calling a K-shaped recovery, here in Canada and globally. As some people begin to recover financially, others continue to worsen.
In this episode of the BDO Financial Wellness Podcast, we speak to BDO Licensed Insolvency Trustee Mike Braga, BDO Licensed Insolvency Trustee. Mike has great insight and helpful strategies to help you cope with affordability and debt challenges. To learn more about our conversation, read the full transcript below.
Tera:
Hello and welcome to the BDO Financial Wellness Podcast. I’m your host Tera Beljo. And in this episode, we’re going to dig deeper into the debt and affordability challenges Canadians are experiencing right now. Each year, our annual survey, the BDO Affordability Index examines how affordable life is in Canada. For the past two years, the Affordability Index has revealed just how much Canadians are struggling with debt and living costs. So, how have Canadian families been doing this year? Well, we know that 2020 has been anything but a normal year. Our newly released third annual BDO Affordability Index reflects that reality. Canadians across the country are dealing with the financial repercussions of COVID-19. For some, the pandemic has changed their perception of affordability. For others, COVID has increased their financial challenges. What may be most concerning is that the pandemic has intensified economic disparity in Canada.
Today, we’re speaking with Mike Braga, Licensed Insolvency Trustee with BDO Debt Solutions. We’ll talk to Mike about the 2020 Affordability Index, including what statistics are most worrisome and we’ll discuss the steps Canadians need to take right now to fortify their household finances for the remainder of 2020 and the year ahead.
First of all, welcome Mike, thanks for joining us. We do have a lot to cover here. So let’s jump right in. To begin with, will you give us an overview of how Canadians are doing this year? What does the 2020 Affordability Index show us about the effects of the pandemic on household finances?
Mike:
So we’ve heard a whole lot about this K-shaped recovery from an economic perspective. Basically what our Affordability Index has shown is that it’s bearing out in reality. There’s a percentage of Canadians — about 40 per cent of Canadians — who are saying right now, it is less affordable to live than pre-pandemic. There’s a small percentage that are saying they’re actually better off. And then the rest of the population, again, another 40 per cent is saying, it’s about the same. And so you’re seeing that that K-shaped reality is coming to fruition. And that’s a little bit concerning to us because going into the pandemic, we weren’t on a great footing to begin with. You know, when we were looking at stats in December, January of last year, we were already seeing that household debts were at record highs and the income to debt ratio was ever increasing.
And so one of the misconceptions that we’ve been hearing about in the last few months, in the last six months: according to the statistics, debt is actually dropping, it’s not actually happening. Debt is dropping for some in the population and it’s having this kind of masking impact. The statistics aren’t telling the story of the 40 per cent of the population right now that’s really truly struggling. And again, as I said, that’s the concerning part about the Affordability Index is that not everybody is being treated fairly during this pandemic.
And the one thing that we’re seeing as well is that this is really a global crisis. So regardless of what country you’re in, you’re seeing similar statistics and similar stories coming from each of these countries, that there’s a large segment of the population that’s really struggling, and it’s being masked by everything else that’s going on. So the forced savings. For the last six months, there really hasn’t been a whole lot of discretionary spending happening as we were in lockdown. That’s giving many Canadians a false sense of security.
For four or five months, when you didn’t have daycare expenses, when your mortgage was on deferral, or you weren’t making your credit card payments, it gave people a sense that things were more affordable than they were, because these expenses weren’t there. And when we know that 50 per cent of the Canadian population doesn’t budget, again, it’s masking the impact. So, the 40 per cent statistic that’s bearing out in our stats, in our poll, I think it’s actually right. And I think there are more Canadians that are actually struggling, but they don’t know it because of these masking effects.
Tera:
So can I ask a question because we’re hearing a lot about this K-shaped economy. Can you explain what that is for our listeners?
Mike Braga
The K-shaped economy indicates the economy is rebounding, but only for a specific segment of the population. And so there’s actually two, there are two curves that are happening. There’s one segment of the population where they’re actually worse off or it’s declining. Then things like the tech sector and people that are able to work from home, or those types of things, they’re actually able to thrive in this particular economy because there really hasn’t been any impact to them. And they’re benefitting from the fact that all of their expenses are being reduced. So all of those extra savings, they can put down on the mortgage, they can put down on their debt. So it’s really a tale of two stories going on in our economy right now. And we need to recognize both.
Tera:
It’s basically making a huge gap again, between the haves and the have-nots.
Mike Braga:
Absolutely. And that’s the concern here because when things do start to rebound, it’s going to rebound quickly for those, as you said, the haves, and the have-nots are still going to be struggling. The economic incentives like the government incentives, they’re just not going to exist forever. And so that becomes a concern and there are major segments of our economy that may not rebound to the extent that they were pre-pandemic. If you look at the hospitality industry, just walking down the main streets of many of our cities, where restaurants haven’t been able to recover and they’re boarded up. These are the stories that we’re hearing. And when you look at some of the economic indicators, you wouldn’t know that. You have to actually walk down the streets to see that many of these small businesses just haven’t been able to cope or thrive.
Tera:
So Mike, this year’s Affordability Index also reveals a change in Canadians saving behaviours. You were mentioning this earlier. More people are focusing on an emergency fund and some are slowing down long-term savings. How should people approach savings goals right now?
Mike Braga:
Well, and this was the part of the Affordability Index or the poll that we did, which really excited me, because for a long time, our attitudes and our behaviors toward savings really weren’t there. Like we didn’t see that there was a pressing need. And so because of the pandemic, what we’re seeing is people are coming in and they’re saying, “Oh, no, I need to do this. I really needed to have an emergency savings fund, or I really need to start thinking about the future,” which was something that we didn’t consider in the past. Because for the last 15, 20 years, we’ve just seen these growth spurts. And it seemed like it was never going to end. And right now there’s been a reckoning.
That has been the positive that’s coming out of this (pandemic) is that people’s mindsets towards savings have changed. And so what I want to do and what we want to do is really capitalize and make it a permanent behavioral change for individuals, because the thing about savings is it’s great to have the thought and the concern about doing it. We need to put practices in place to actually make it happen — to automate it and to also make sure that we have the foundation like the financial tools available in order to make that happen. Again, I indicated that 50 per cent of Canadians don’t budget. You can’t start a savings plan unless you have a budget.
I was talking to one client recently and they kind of said, “You know for me, budgeting is like a diet. I do it when I need to get restrictive and watch what I’m doing.” And I’m thinking that is not the attitude to have towards a budget. A budget is really a tool that’s there to help you, to guide where your spending is going. If it’s restrictive, like completely restrictive in that you’re not doing some of the things that you want to, and you don’t have a good set of goals to measure it against, you’re not going to do it long-term. And so, like a diet, it needs to be balanced and something that you’re going to be able to do long term.
That’s what I encourage people to start right now. First look at your budget and make sure that it’s balanced. Make sure that it’s working for you. Make sure that all of those payments and things that you’ve deferred for the last six months you’ve contemplated it and you considered, and then you add them back into your budget. Because again, that’s going to be happening. Then carve out a few dollars as well for some savings and automate it. It’s similar to paying your taxes, or all of those government programs that get funded automatically out of your paycheque. If you start taking it away out of your paycheque on a routine basis, you almost start to not notice that it’s coming out and it hurts a little bit less. And even small amounts build up over a long period of time. That’s really what we need to consider right now.
Tera:
And what about emergency funds? Why are those so important? And especially, I mean, we’ve just gone through, or we are still in a pandemic, where an emergency fund could have been key.
Mike Braga:
Yeah. So it’s an acknowledgement that life happens. And as much as you want to plan and you want to control all of the expenses that are coming out, there’s going to be a period when you face an illness, job loss, or your roof starts leaking and all of a sudden you need to make that repair. These types of expenses happen. And having that emergency savings account just begins to be a buffer. And so many Canadians that we were seeing pre-pandemic were relying on their line of credit or their credit card in order to fund their emergencies.
The issue with doing that is that once you start paying that back, you’re paying interest on it. And so it actually can cost you sometimes two to three times as much to pay that expense. And so what I tell people is, you know that expense is coming, you know there’s going to be an emergency at some point, so why not start saving for it now. Put those dollars in your account. And then when the emergency happens, you’re not worried about having to pay that interest.
Tera:
So what about savings goals? Should people be prioritizing those right now?
Mike Braga:
We do. Now there’s a lot to prioritize right now. So what I’m telling people when I’m counselling them is that right now, stability is the key. So get that budget in a place where you’re able to meet life’s needs and the extras, the savings goals, the emergency savings fund and long-term savings. These are great, but if you’re struggling to put food on the table or not sure where your next mortgage payment is going to come from that (savings) needs to be secondary. And right now that’s okay. But certainly once the pandemic is over and things start to return back to normal and there’s a normal wage coming in and things are stabilized, at that point the priority (to save) needs to be there.
Again, right now there are many people in this country that are still in crisis management. We’re talking about those individuals, especially many self-employed or small business owners, they’re just trying to survive. And so crisis management is important. And crisis management means stripping down to the bare bones budget. Making sure your needs are met. If there’s anything extra, you want to put it aside for next month. And I know that that’s hard to live by, but again, if you’re in that crisis management mode, you need to do that because we don’t know how much longer that this is going to continue.
Tera:
Sure.
Mike Braga:
We’re in the middle of a second wave. We don’t know…as much as the government is saying, they’re trying to avoid another lockdown, it’s quite possible that in the next few weeks, we might start seeing some more targeted lockdowns. Which means work shortages, reduction of overtime hours, those types of things again. So we need to be prepared for that and start taking those proactive steps right now.
Tera:
So for those who want or need to save more, what is the importance of debt reduction or debt relief, even when debt is overwhelming to some?
Mike Braga:
That’s the importance. Many people right now have this perception that life isn’t affordable because they’re carrying a tremendous amount of debt. Pre-pandemic, we were saying that the average Canadian is carrying about $30,000 of unsecured debt. Imagine now that we’re going into this situation where income levels have reduced, hours are reduced at work, and you’re struggling to get by. If you’re trying to make payments on all of those debts, of course things are unaffordable. And so that’s where debt reduction or debt relief or meeting with a Licensed Insolvency Trustee to discuss options becomes extremely important and vital for long-term sustainability.
And perhaps right now is the best time to start looking at something of that nature, because it’ll actually relieve a lot of the pressure and stress that you’re feeling right now. The pandemic is creating not only a financial crisis and a health crisis, but a mental health crisis as well. And if you’re burdened by the debt and worrying that those bills are coming in every month, it (debt) is just going to add to your stress. So knowing that there are options available to you, knowing that there are various strategies that you can employ to deal with that debt apart from just avoiding it and burying your head in the sand is extremely important and can alleviate some of that stress for people.
Tera:
So what would you say to those Canadians who have told us that the pandemic has had no effect on their finances or say they’re actually better off? Overall, this is a large number of Canadians, it’s 61 per cent,
Mike Braga:
Right. And for those individuals, I would say, let’s be diligent. Because as I was saying at the top, I mean, there’s a lot of things that are happening right now that are masking what the reality is for many people. So daycare, if we take daycare, for example, for many households…
Tera:
That’s a big deal for me.
Mike Braga:
… but if you take that as an example…for many households, for the first four months of this pandemic, when daycares were closed and people were working from home, all of a sudden you’re saving, could be for many households about $1,000 a month. But that’s not actual savings, right?
Tera:
No.
Mike Braga:
Like, do you know what I mean? Because that expense (daycare) is going to come back into your budget. And so for many family units where they weren’t paying that expense, it was all of a sudden they could breathe a little bit more and they could tackle some renovation projects around the house. So see, things seem to be more affordable. And for the short-term period, they were but that daycare expense is now coming back into the budget.
Tera:
Exactly, exactly.
Mike Braga:
And so it’s a false sense of reality. During this abnormal period, we really need to be sure that we’re taking it into perspective and being very diligent about our expenses and adding those things back. And that’s where I go back and say, go through your budget, make sure you’re adding those things back in, and let’s take another look at it, and see where you are at that point and start making plans for the next six, eight months as things start ebbing and flowing.
Tera:
And people aren’t eating out as much anymore and other things that they’re not spending money on.
Mike Braga:
Absolutely.
Tera:
So how else can they avoid or cut back on “nice to haves”?
Mike Braga:
So again, it’s one of these things where I talk a lot to my clients about conscious spending. From the moment that we wake up in the morning to the time that we go to bed, we are bombarded with messaging and people that are trying to separate us from our money. And so what I want people to do is be very proactive about where they’re spending their dollars on and making a conscious decision. And that’s not to say that, having that as a line item in your budget is a bad thing or good thing, it means that you’re making your decision that that’s where you want to be spending your dollars. That’s the main difference because it makes a huge difference in terms of all of those budget bleeders that are coming out of your budget.
When I first started budgeting myself, when I started working at BDO, one of my major expenses was coffee money. And to be honest with you, I didn’t realize how much I was spending until I actually sat down and wrote it down.
Tera:
(Laughter) I’m feeling personally attacked here, Mike.
Mike Braga:
I’m so sorry. And that’s not the intention. It’s not an attack. But when I went and I wrote it down, I was startled by the amount that I was spending. Do I still go out and get my coffee? Absolutely. But now I budget it and say, okay, a coffee a day. That’s it. Put that aside, and that’s what my budget amount is. If I decide on my way home to grab the extra coffee, that’s perfectly fine. It means that one day out of this month, I’m going to go without, but that’s a far cry because when I look at that line item on my budget again, it’s more aligned and I don’t have that sticker shock. It becomes a conscious spend.
That’s the important thing. When people come to us and they start talking about budgeting, they think we’re going to be judging them and saying, “Oh, you spend your dollars there?” And that’s so not the case. And as I said, if you looked at my budget and my splurge items, books, and travel, you would be shaking your head saying, what are you thinking in these categories? But that’s the importance of a budget.
Tera:
Well, and you have to budget for what’s important to you, right? And try and make it work for your family or your household.
Mike Braga:
Absolutely. A budget is intended to make sure that you’re meeting your needs. Doing the things that you have to do and allowing you to do some of the things that you want to as well. If it’s too restricted that you don’t have those things in your budget, you’re going to stop doing it (budgeting). It’s like that diet where you can’t have carbs. Well, that’s good for three days, but on day four, you’re going to be hungry, right?
Tera:
Exactly.
Mike Braga:
So that’s the thing about balance. And with finances and budgeting, balance is the key.
Tera:
So debt load has become overwhelming due to COVID-19 for some, worse off were almost four times as likely. I think the statistic is 46 versus 12 per cent (better off). Is that correct?
Mike Braga:
That’s right. Yes.
Tera:
So for those where feeding a family is challenging. What can they do?
Mike Braga:
This is where we go back to meeting with the Licensed Insolvency Trustee to discuss the debt issues. Figuring out what options are available to resolve the issues is extremely important. There are legislated options that are available to help you hit that reset button and to turn that page on your story, and come out of debt on the other side. But those are only two options. The key with a Licensed Insolvency Trustee is that we are federally regulated. And one of our requirements is to make sure that you’re aware of all of the options that are available to you.
So we look at everything from, do you have equity in your house that possibly you can refinance to help pay down your debt? Now would be a good time to access it. House prices have gone up, interest rates are lower. So if you can refinance you’re doing something to help yourself because as I said, the interest you’re going to pay is lower. And you can incorporate that into one monthly payment, which is extremely helpful. So we look at those types of options.
We look at budgeting options and if there’s a way to resolve it (your debt) just on a budgetary basis. And so when people think that they’re calling a Licensed Insolvency Trustee, they’re in dire straits and it’s the end of the line for them. That’s not the case at all. We are a lifeline helping people to find the debt solution that’s right for them.
Tera:
I hear a lot because I monitor our Facebook and our Twitter. And a lot of the feedback we get is, “Oh, filing for bankruptcy, filing for consumer proposal, it’s going to destroy your credit.” So can you talk to that a little bit?
Mike Braga:
A bankruptcy or consumer proposal, these are options that are available to let you hit the reset button. The Canadian government has come up with these pieces of legislation to say and acknowledge that they know that, for Canadians, life is going to happen. And so whether it’s a job loss, health crisis, something of that nature, there needs to be a solution available to these individuals who have gotten into some debt issues to get out on the other side. Now, in order to do that, yes, there is some impact to your credit rating, but it’s not as tremendous as people indicate.
People hear that whole seven-year rule, that a bankruptcy is going to be on your credit report for about seven years. And that’s the case. It is going to be on your report. But the more important item that people don’t realize is you get to start re-establishing your credit in that period of time. And that banks and financial institutions will start to look at you more favorably — even if you filed bankruptcy — if you were diligent about rebuilding your credit and proving that you’re a good credit risk. So, that whole thing that it’s going to destroy your credit, no, that’s not the case. And it’s one of the misconceptions that keeps people from coming in to see us.
Tera:
Let’s get back to the 2020 Affordability Index. When we look at the results compared to last year’s findings, we see a real change in the perception of affordability. Canadian’s financial priorities seem to have shifted, but that’s not necessarily true for everyone, right? So will you talk a little bit about this?
Mike Braga:
Yeah. We’re seeing that there are segments of the population that again, they’re seeing that affordability as a challenge over others. Certainly the self-employed. And you can understand that because they are uniquely impacted by the COVID situation. Self-employed individuals would have the flexibility to earn a lot of dollars and as much as they could by increasing their contracts or those types of things. Now, with the COVID situation for many self-employed individuals, they find themselves completely out of work. Thankfully, there is the CERB benefit that was instituted, and now that’s being transitioned to the CRB benefits. So there is government assistance to help these individuals. But their income is being replaced at a much lower amount. And also with people that are on the lower incomes side of things as well, we’re seeing that there’s been some disadvantages to COVID, particularly for those individuals.
Young individuals, so 18 to 34-year-old, who really haven’t had a long runway of financial health type situation where they haven’t been in the market for a significant period of time. They haven’t had the opportunity to build equities in properties or those types of things. They’re struggling as well, comparative to somebody who has had a longer runway in their 50s and 60s where they’ve had the longer ability to save and put dollars aside and build up that equity. That’s where we’re seeing that there are these large discrepancies in the population of who’s being impacted by COVID.
Tera:
Okay. So let’s circle back to those people who are struggling. A lot of families were just making ends meet before the pandemic, and then the 2020 Affordability Index results show that almost three-quarters who had increasing debt before COVID-19 say their debt has increased more this year. What advice do you have for Canadians who just can’t catch up or feel like they’re spiraling right now?
Mike Braga:
So again, the first piece is budget.
Tera:
Always budget.
Mike Braga:
Always budget first. And again, I say that because it is astounding to me that you keep hearing the statistic that regardless of what’s happening, 50 per cent of people don’t have one. So budget first.
Second is setting aside some time to actually prioritize, to make a set of priorities or financial goals for yourself and your family. These are your guiding principles. We often tend to spend without having these financial goals or priorities in mind, and that’s what’s causing a lot of our debt issues. We need to get a handle on that.
Third, we want to make sure that we’re curbing any non-discretionary expenses. If you’re struggling right now, the first place to look is, “what can I cut back on?” And even things that we think are fixed like cell phone contracts, cable bills, those types of things, insurance policies, it’s time to take a look at them and see if there’s a better option out there, or if you have all of the coverages you need, or if you can lessen them a little bit, because any dollar saved is at this point is extremely important.
Tera:
Agreed.
Mike Braga:
The fourth piece is also to have these discussions with your family members and the people that are impacted by your financial decisions. We don’t talk about money enough in relationships or in households. And we’re setting priorities based on what we think is best for the family. And when I say we, it’s usually one individual in the household, who’s making those decisions. It’s important to have everybody on the same page and everybody understand where we are because the bank account balance is not an indicator of financial health. And just because there are dollars in the account, doesn’t mean that things are affordable or not because those dollars could be earmarked for certain expenses. A clear communication path is extremely important.
Tera:
Okay. What about RRSPs? Should they cash them in?
Mike Braga:
Again, it depends on the circumstance. I’m very reluctant to advise people to take their long-term savings that they’ve accumulated and withdraw them in order to satisfy short-term needs. Having said that we are in a crisis situation, and if your family is in a crisis, you may have to in order to put food on the table and make those mortgage payments. And that’s fine. What I caution people against is only take the amount that you need, be careful of the tax consequences and make sure that you’re getting advice on that because that may put you in a different tax bracket by collapsing those RSPs. And so come April next year, you may be trading in one problem for another. Or you may be solving a short-term solution right now by collapsing those RSPs and creating the long-term one with tax debt come next year. So make sure you’re getting advice. Typically, my rule of thumb is if you put those away for retirement and you earmark them, you kind of almost want to forget that they exist and try to find other strategies in order to cope short-term, if possible.
Tera:
So if a person is at a place where it’s time to contact an LIT and meet, can you discuss what happens in that process when you visit a BDO Licensed Insolvency Trustee?
Mike Braga:
The first thing that’s going to happen is that the Licensed Insolvency Trustee is going to talk to you about what’s happening and what your goals are in terms of what are you looking to have happen here, short and long-term. It’s going to be a very comprehensive discussion. And again, it’s free of judgment, at least at BDO it is. I mean, we understand where people are coming from when they pick up that phone. So we’re going to be asking those difficult questions and it may be a little bit uncomfortable to answer. But the purpose of that is so that we get a full understanding of where you’re coming from and what’s happening, so that then we can present you with the best options that are available to you in your particular situation.
There’s no fee or pressure when you come into these meetings. That first meeting is just your opportunity to get the information that’s necessary for you to make a sound financial decision. If you’re putting off that call or reluctant to make the phone call, I suggest you do it and hear somebody out and have that earnest and honest discussion and see what comes out of it. The worst thing that can happen is you don’t like what you hear and you find a different solution. But arming yourself with the information is extremely important because at least you know and you can make an informed decision for yourself.
Tera:
Well, thank you so much, Mike, for taking the time to sit down with me today, I really appreciate it. And it was lovely chatting with you.
Mike Braga:
It was a pleasure. Thank you.
Tera:
I’d like to thank Mike Braga, BDO Licensed Insolvency Trustee for taking the time to talk to us today. And thank you for listening to this episode of the BDO Financial Wellness Podcast. For more resources, tools, and advice about managing your debt during this difficult time, please visit our website debtsolutions.bdo.ca. And for more podcasts and videos, visit our YouTube channel BDO Debt Solutions. And remember, we are here to help you turn the page on debt.
October 21, 2020
What does affordability mean to you? Has getting out of debt become a struggle? For most of us, at this point in time, the answers to these questions will depend on how our financial situation has been affected by the ongoing COVID-19 pandemic.
