Budget Sense

Could having to save big money for a down-payment be a big reason why the economy in Canada is not rebounding?

In the last 5 years or, house prices in Canada have gone up dramatically, especially in major cities like Toronto and  Vancouver.

This got me thinking: could it be that so many people are saving for a down-payment , and as a result, they don’t spend this money on other things that would otherwise revive the economy?

If you notice, house prices started becoming more and more unaffordable just as the world economy was emerging from the recession in 2008.  While Canada escaped the recession with little pain, it hasn’t been that great ever since. The unemployment situation is never stable, going up one month, only to go down the next month and so on. The same with the GDP; it is barely going over 2% for this year so far.

I know there are many other factors (including the large amounts of cash being hoarded by corporations) but when it comes to personal finance, how much is ‘saving for a down-payment’ hurting economic activity? And as we all know, with house prices being this high, the DP has to be a large sum. If the average house price in the GTA is around $500,000 and since the longest amortization period you can now do is 25 years, then really, to afford the monthly payments, the lowest amount you should put for DP is $75-100K. And even then, you are still looking at a mortgage of at least $400,000 over 25 years: even given today’s historically low interest rates, you are looking at a high monthly payment. Therefore, people looking to buy a house have to save for years and years, to come up with a good amount for a down-payment. 10-20% is a good amount.

If you have even 200,000 families saving for a down-payment at any one time, allocating an average of $750 a month, you are looking at $150,000,000 in money that is being saved and not spent every month. That is $1.8 billion a year of lost economic activity. To some it may seem like a drop in the bucket. But $1.8 billion is a large sum of money any way you look at it. It could easily create some momentum in the economy and the spinoff effect will be significant.

The expenses never seem to end. But neither does my determination to lower my credit card balance and eventually make it

Taking one step forward and two backward will never help you pay off your credit card balance. You should have a clear plan, timeline and a real determination to pay it off…

disappear completely (balance of ZERO dollars!)

It has been a big struggle to keep our-myself and my wife-credit card balance under control. Just when you thought you have made some progress, comes a wedding or an emergency and you end up putting some or all of the expenses on the credit card. But the more unexpected expenses I get, which raise our balance back up, the more determined I get to bring it back down. It is easy to get discouraged when you are fighting what seems to be a losing battle at time, but it is important to stay focused and resolved.

In other words, instead of taking one step forward and two backward, I want to reverse that and take at least two steps forward and one backward.

Beside being determined and focused, it is also important to have a clear plan and timeline on how to lower or eliminate your credit card debt. Simply wanting to is not enough, especially not when your balance is in the thousands. My own balance, at least when compared to others, is not that big. It is currently sitting at around $3,600. But I don’t like to compare myself to others and give myself a false sense of hope. Just because my friend or cousin has a $20,000 credit card balance doesn’t mean I should feel good about myself for having only $3600 in credit card debt. Such comparisons may be helpful in making some broad generalizations but shouldn’t be used to judge how your situation is. It also works the other way. No need to compare your $20,000 credit card debt to someone else who only has $3,500 in debt or any other amount that is much smaller. It will just make you feel discouraged.

As long as you have a plan, a timeline and a strong determination to win, you should be able to win the battle against your credit card.

And last but not least, I noticed we have developed a pattern that is not very helpful in paying off our credit card balance. Basically, we are more worried about how much room we have left in our CC than what the balance is. In other words, as long as the available credit is enough to get us by or help us make that important purchase, then that all that matters, regardless of how big our balance is.  This is a very dangerous way of thinking about your credit card.