Oct 132014
 

The trickle down effect

It has been said that if we cut taxes for the rich and help profitable businesses make even more money then the economic benefits would trickle down from the top to the rest of us. But for many in the working class this has simply not been the case. 🙁

14-10-trickle-down-treading-water

14-10-household-income-us treading water The top 1% have never been wealthier, but the rest of us still face many financial roadblocks. Both consumers and governments of all levels are still carrying a lot of debt. However real incomes in the U.S. have been slowly declining since 2008. Up here in Canada our debt-to-income ratio is near an all time high.

We often receive conflicting messages from policy makers. The Canadian Central Bank is keeping rates low to encourage consumers to spend and stimulate the economy. But at the same time it says that rising consumer debt is a major risk in this country. That’s right, patronize consumers for their debilitating debts when the Central Bank is responsible for creating the cheap money in the first place. Sound logic, Mr. Poloz. 😛

“Even a slight [increase] in the interest rate will push thousands into bankruptcy,” says Frank Bennett, a bankruptcy insolvency lawyer in Toronto. We’re already seeing “approximately 10,000 consumers going bankrupt a month in Canada,” Bennett says. “They’re paying exorbitant interest rates on credit cards and household debt. They’re using one credit card to pay another and they’re out of money by Friday night.”

Don’t panic, but be prepared

When the cost of borrowing does go up eventually here is how we can protect ourselves. Stress test our finances and envision what will happen if all the interest on our debts increased by 2%. For example, if your current mortgage rate is 3%, ask yourself if can you afford to pay 5%? If you can still comfortably service all your debts if they were 2% higher then you’re fine. 😀 If not, then accelerate your debt payments now while money is still cheap.
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Why use 2% as the benchmark? Because a BMO survey released in March reported that 20% of people would find it difficult to still afford their home if mortgage rates were 2% higher. And I’m pretty darn sure the Central Bank would not want to risk a 20% delinquency rate on all mortgage payments across the country because that would cause a real estate market crash, and send our economy into a free fall. 😯 So instead, when mortgage rates go up it will have to be incremental, slow, and drawn out over a long period of time. We just have to re-evaluate our debt levels again after each rate hike so that we always maintain that safe margin of safety and not lose any sleep over our debts. 😀

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Random Useless Fact:
This is what happens when an American is asked to label a map of Canada

14-10-canada-map-label-americantreading-water

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Mario
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I’ve mentioned many times that our macro indicators fail to capture anything even resembling the whole picture. I suppose that’s the easy answer though; the tough part is moving forward with social policy that takes this into account

AssetGrinder (@AssetGrinder)
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Wow that is a scary statistic. So many people living pay check to pay check. Makes you quite nervous. But hey if 20% cant afford their mortgage if rates go up 2% it will be a huge buying opportunity in real estate markets.

debt debs
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This gives me comfort that we are only 4 years from being debt free. 🙂

DividendDeveloper
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Those are pretty scary statistics. 20% couldn’t afford their mortgage? At the same time, is it possibly the consumers’ fault for stretching a bit and buying the largest/most expensive house they could, without any cushion in their finances?

FrugalitytoFinancialFreedom
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The government teaches its citizen to encourage spending to boost economy and the school system fail teach our kids the importance of personal finance/saving (except on kindergarten when they teach about the grasshopper and the ant tale). I think its more on competition between nations on who has the better economy. By doing that they are putting their own people on debt and they will say “don’t worry we will take care of you when you are old, we will put you on a nursing home but for now work for us until you are 70 years old, just keep on working and keep on spending for now”
FFF

Lynx
Guest

Interesting statistic with the 20%. I need to try that stress test scenario. I don’t see there being any problem with me paying my debt but have been thinking about reducing the amount of items on my debt profile for the rest of 2014 and 2015.

I love that graphic, hell froze over ant the lake of maple syrup are the best part 😀

JR
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JR

I do know that the U.K.’s experience with tax cuts across all incomes boosted the incomes of the rich and the poor. Margaret Thatcher always took issue to the socialists complaint about the “rich getting richer” responding with, “Your telling me that you would rather have the poor poorer, so long as the rich weren’t so rich”.

You will find that the root cause of the complaint from most people complaining about the “rich are getting richer” is pure envy. One must focus on improving themselves and their situation, and not on your neighbors situation.

We are blessed in Canada right now. Our taxes have been going down for over a decade. The federal budget is balanced, and the middle class has never prospered as much as it is right now. It most certainly could be worse!

Steve
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I really can’t understand how so many people live pay cheque to pay cheque: is it because they can’t control their spending or are they really that desperate financially?

Paul N
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Paul N

Whatever happened to common sense, and personal responsibility? Knowing how much I have made yearly, and how I have been able to pay off my mortgage (twice as i bought a bigger house after the first one with one salary) – I don’t get it. I am also well on my way to having a nice amount put away in case I do make it to retirement age. I really get cynical when i read these types of sad sounding stats. The popularity of shows like “Property Brothers” really shows the mentality of some folk. Lets buy a $750,000.00 house renovate it for another $100,000.00 because it just not perfect… Please. Most people set themselves up for failure. Learn to live below your means – not above. Buy a smaller house, buy a used car, keep your electronics until they die, put a little money away for a rainy day, its really just that simple.