The effects of COVID-19 on personal finances in Canada could be severe despite government help

The effects of COVID-19 on the personal finances of Canadians could be severe. But now it may be time to make tough decisions to restore crucial lifestyle choices that led to a massive buildup of debt since the Great Recession.

The federal government has stepped up and is providing help to workers and businesses to cushion the impact of job and income losses. Banks are deferring loans and mortgage payments. And some landlords deferred rent. These positive moves will help many people and businesses, but the initial financial situation of Canadians is fragile.

COVID-19 could push people into bankruptcy

In January 2019, nearly half of Canadians surveyed said they were $200 away from bankruptcy. Additionally, 45 percent of those surveyed said they would need to borrow more to pay for living and family expenses. And in a recent survey, more than a million Canadians said they were on the brink of bankruptcy.

Canadians are among the most indebted people in the developed world. The compound annual growth rate (CAGR) of the ratio of household debt to disposable income (after taxes) before the Great Recession (2007) to the third quarter of 2019 was 2% , increasing from $1.45 to $1.77 of debt to $1.00 of income. For every dollar of after-tax income, the average household owed $1.45 and $1.77. Meanwhile, Americans reduced average household debt over the same period, from $1.38 to $1.02 of debt to $1.00 of income.

The CAGR of average Canadian household spending between 2009 and 2017, the latest figures available from Statistics Canada, was 2.1%. The CAGR for housing and transportation were each 3% during that time. In both periods, housing, taxes, transportation, and food represented 64% of total spending. Health expenses remained at 3%, going from $2,000 to $2,500 in the same period.

Household per capita income increased at a CAGR of 2.5% between 2007 and 2016, about the same as inflation.

The debt service ratio, debt as a percentage of disposable income, is more realistic for assessing the probability of debt repayment. The proportion of Americans fell from 13% in 2007 to 10% at the end of 2019. The proportion of Canadians in 2019 remained at the 2007 record level of 14.9%.

Conclution

I pray that you find these guides helpful in navigating today’s unprecedented situation:

1. Prepare a budget for the next three to six months. Understand that a budget is not a restrictive tool, but a liberating device. It is your best estimate of likely spending in a future period to meet particular goals. You control it. It should never control you. If you’re married, you and your spouse need to be on the same page to benefit.

2. Remember, deferred loan repayments will be due in a few months, so budget for repayments and try to set those funds aside.

3. If possible, pay off your high-cost consumer debt.

4. If you have an emergency or capital fund, don’t use it unless the affordability ratio applies.

5. Don’t be afraid to seek help from your church or trusted advisors.

Hear from real experts, stay home if possible, and practice physical distancing. The blood of Jesus covers his followers, but it gave us common sense to make wise decisions. In the meantime, let’s continue to follow the golden rule and do to others what we would like them to do to us.

I am grateful to those on the front lines keeping us safe. Now that we know who are essential in our society, I pray that we respect them and compensate them well, now and when we get through this stage.

Stay safe!