Debt: Why drown to learn how to swim?

Sometimes we all need to reassess ourselves. Sometimes we all need to step back and examine where it is we are going and where we have been. In writing this column for Advisor.ca, it is probably time that I reevaluate my stance. I’m concerned that in too many cases people are handed financial power tools and then not only are the instructions withheld but it is as if they are blindfolded, spun around and around, before being let loose to figure things out for themselves. It’s not that we need to protect our clients from access to credit but rather show them how to use it to their advantage so they can harness the real potential of their cash-flow by efficiently using those tools.

Think about it for just a moment: What are the chances you could cut a straight line if I blindfolded you, handed you a circular saw and told you there was a 4×8 sheet of plywood right in front of you? How successful would the average person be? Is it the saw’s fault? Did the tool malfunction? Could it be that the tool is both powerful and dangerous? Wouldn’t it be smart if all tools, including financial ones, came with guidelines, instructions and advice in order to increase the chances of a better result?

Just to be clear, I don’t think we shouldn’t have access to home equity lines of credit. I don’t think credit cards should be banned or that everyone should have to save cash to buy their next car in cash. I do believe though that debt is a tool and if we are to manage our national debt-to-asset ratio to the best of our abilities, we are going to need to learn for ourselves and teach our clients how to swim before we are drowning in debt.

In his response to my last column Helmut Pastrick wrote: “A rising debt-to-income ratio is not necessarily a bad thing because debt can be good if it is accrued for useful purposes and if it is held by people who can afford to repay it.”

Agreed; debt can be both good and purposeful. And of course we hope it is held by people who can repay it. But do we know that is the case? With vehicle loans and leases in particular what you can afford and what you qualify for are two very different things. When applying for a home equity line of credit your debt service is examined but your shoe fetish or gadget addiction is not.

Yes, we are all grownups by the time we can borrow any serious money but I am here to tell you far too many of us don’t know how to determine how much money we can really spend in a given month and still be prepared for the unexpected. For the record, I don’t think mortgages are good debt. While you borrow against an asset that can and should grow in value the interest is non-deductable at this point in time. Furthermore, people can easily allow their emotions to take hold and cause them to spend more than they can afford on a home – again not what they qualify for but what they can afford. This can become a serious issue when it comes to home improvements and even home décor.

“Central 1′s analysis shows the fastest growing debt segment in the past decade has been personal lines of credit, which are up 455% since the end of 2000 led by home equity lines of credit,” Pastrick also wrote.

That is a great stat to argue my concern. I happen to love home equity lines as a tool to better manage a financial plan. In particular, I am partial to the All-In-One variety. However, I know from dealing with hundreds of a cases and assisting other advisors on hundreds more that these debt tools can be made up of any kind of previous debt and can be fuelled by any kind of spending. I use some form of home equity line in the majority of the cases I work with. I also provide the owner’s manual, so to speak. I show people where that “safety switch” is. I help them learn how to use these financial tools so the results I have shown are indeed possible. I would be horrified if these products became less accessible because of new rules that are supposed to protect us from ourselves.

Why put our clients, ourselves or our country at risk by not learning how to manage debt tools now?

Pastrick says: “The growth in household debt will slow in coming years as the population ages and boomers pay off their mortgages, though reverse mortgages are likely to become more popular.”

On this point you must excuse me. I have to laugh out loud.

I’m not even sure how one can conclude that household debt will do anything for sure. First of all we need to see that boomers are actually on track to pay down these mortgages before we can rely on this possible factor as a reprieve from household debt. As of last spring, RBC’s First Annual Retirement Myths and Realities Poll reported that 4 in 10 Canadians were retiring in debt and that 28% of retirees were seeking out new credit products. As I wrote in my column Booming Debt, nearly 60% of boomers still have mortgages nationwide according to TD’s Boomer Byers Report.

The thing with stats is they are just indicative of what is happening on average. Your clients are not necessarily that average. This is why you need to be made aware this is a national issue so you’ll find out if debt is an issue for your clients. I bet not one of your clients actually has 2.2 children and I’d say it’s likely that you don’t have many clients with one and a half X chromosomes and half a Y chromosome either. Stats are just more tools we can utilize.

Just like you can’t use them to frighten clients in to giving up their lattes, you can’t look to stats to let you off the hook. While debt is a national problem, what we really need is an individual case-by-case solution. There are people with no debt and people with loads. All I want you as the advisor to consider is if you don’t work with and talk to clients about debt you don’t know for sure how any of those stats relate to their current situation or status.

“Another important step would be to increase financial literacy so people can better understand the dangers of credit card debt and know the difference between good debt and bad,” he wrote.

I totally agree financial literacy is very important. However, we need to give this issue more than lip service. Saying financial literacy is an important step and actually taking a step are two very different things.

The solution as I see it is this:We already have a network of professionals across this country who deal with many Canadians on a regular basis for investments and insurance. These people have already established a relationship with people who make up those stats we are so fond of reporting.

The financial literacy solution is already on the ground we just need to train the right people. What we need to do is add a layer of new skills, tool and the manuals to go with them.