Why You Want to Avoid Debt at Every Age

Whether you are about to start your post-secondary education, start a family, or are headed for retirement, debt problems can happen at any age. While the average person who files for bankruptcy in Canada is in their mid-40s, Hoyes Michalos has filed bankruptcy for people as young as 18 and as old as 93. Avoiding bankruptcy means taking charge of your debt choices at each of these milestones and being prepared to handle any challenges that occur along the way. On today’s podcast we explain why you want to avoid debt at every age.

In your 20s: Debt Repayment and Establishing Good Habits

Whether you’re dealing with student debt, or just have your first credit card, it’s important to start your finances off right. Clients we see in their 20’s typically took on too much debt, too fast. The quickly accumulate an average of $29,000 in unsecured debt, forcing almost 4 in 10 to turn to payday loans. To avoid this nightmare scenario:

  1. Learn to plan and budget. Set small financial goals, understand what you want your money to do for you. Explore different budgeting programs and find one that works for you.
  2. Build good habits early. Track your spending and remember that every dollar should have a purpose. How you start is likely how you will continue.
  3. Start an emergency fund. Even a small amount of money set aside can help you avoid relying on credit cards for unexpected expenses.
  4. Establish good credit habits. Be sure to understand repayment terms and always repay your card in full to avoid interest charges and to establish a good credit history right from the start.
  5.  Make a plan to pay down student debt. Once you’ve graduated, one of your biggest responsibilities will be to repay your student debt. Create a plan to repay it aggressively in order to avoid being burdened by student loans for many years to come. Making payments now can help you avoid thousands of dollars in interest payments over the next few years.

If you can, you might consider building a savings plan now so that you are better prepared for any large purchases like a car or even unexpected emergencies like a job loss down the road. Consider learning how to invest since time is on your side. You can afford to take more risk now than in your sixties. Put the benefit of compound interest to work for you.

Download: Free Budgeting Worksheet

In your 30s and 40s: The Family Years

According to our data, this is the most likely age group to file for insolvency. Why? Because this is when expenses grow and we are most reliant on taking on large debts. You may still be repaying student loans, have a car loan and a mortgage. Debt repayment, on top of the high cost of child care and housing costs, can be a challenge to balance without using more debt to make ends meet. This is also when life throws in very expensive curveballs like divorce and job loss. Our average client in their 40s saw their debts slowly accumulate to roughly $59,000.

It’s crucial to be prepared so you can avoid accumulating more debt than you can repay:

  1. Maximize your income and set career goals. If you need to gain any skills to upgrade your job and earn a higher salary, now is the time to make this investment in yourself. Recognize your worth and try to earn more than you need to spend.
  2. Take advantage of employer savings programs. If your employer offers matching RRSP contributions, you should take advantage of this program. You’re unlikely to get double the return on your investments anywhere else, so be willing to put away 3% or 5% of your paycheque into this automatic savings plan.
  3. Continue to pay down debt. If you have any non-mortgage debt, paying this off should be a priority. Budget to put any extra cash into debt repayment. The standard target for student loans to be paid off is 10 years after completion of studies. If you have other unsecured debts like credit cards, you should absolutely make a plan to pay them off to avoid getting trapped by high interest and fees.
  4. Avoid joint debt. If you are in a serious relationship or are married, you might feel obligated to co-sign on your partner’s debts – whether to help him/her qualify for a loan or to help them make payments. We would strongly caution you to avoid joint debt, as you would be making yourself 100% liable for its repayment. A separation or divorce will further complicate your financial picture and lead you to face hardship that could have been avoided.
  5. Build a bigger emergency fund. If you are gainfully employed in your field of work and not living paycheque to paycheque – that’s great news! In this time of financial stability build an emergency savings fund to last you 3 to 6 months to weather an unexpected downturn like illness, job loss, or divorce, and avoid adding to your debt load.
  6. Save for retirement. If you haven’t already, now is the time to think seriously about retirement planning.

Read more: Should you have a joint bank account?

In your 50s: Peak Earnings and Pre-retirement Planning

Our average debtor in this age category has built up $63,000 in unsecured debt. This is often the result of years of only making the minimum payment on loans. Another contributor is unpaid tax debt that accumulates over time.

You should follow these steps to avoid having any financial issues at this point:

  1. If you’re not already debt-free, make a plan to be. Whether this involves lifestyle deflation and putting cash regularly into debt repayment, or even going through with a professional debt relief plan, you should intend to eliminate any and all of your debts before you retire when you will be living on a limited income.
  2. Avoid becoming the bank of mom and dad. Your children may ask you to lend them money. We would advise against this. If you can afford to give your children money, with no expectation of it being returned, then by all means, go ahead. However, we suggest you never lend money to family and friends if you cannot afford to part with it. You should especially avoid borrowing to lend.
  3. Talk to a credible financial planner. Now is a good time to meet with a credible financial planner if you need help with retirement planning and to determine what your priorities should be going forward for the next few years. Consider questions like what you would need to do to be ready for a forced early retirement, illness, or job loss. Be sure to visit a certified and fee-only financial planner for advice and avoid financial advisors at your bank who may only be selling you investments, instead of a plan to prepare for retirement.
  4. Plan for retirement. Ask yourself if, and when, you can reasonably afford to retire. If you have debt and retirement savings, think carefully about what to do with those funds. While you may think about cashing out your RRSPs to pay off what you owe, you may be risking your retirement unnecessarily.

Read More: Think Twice Before Cashing in your RRSP to Pay Off Debt

In your 60s: Post-Retirement

Retiring with debt is the true nightmare scenario. Our average client over the age of 60 has more than $64,000 they are trying to repay on a fixed, and lower, income. They are often forced to remain in the workplace just to keep up with debt payments.

As you are entering your 60s:

  1. Understand your income and expense needs. Know that your income will drop in retirement, and cut back early. Don’t use debt to carry on a pre-retirement lifestyle.
  2. Be prepared for long-term care costs. Illness and death of a family member are two costs which can break even the best financial retirement plan.

In summary, make good borrowing decisions early and you can avoid debt problems as you age. However, if you are facing debt problems, no matter how old you are talk to a licensed insolvency trustee about your debt relief options early.  There is no point in carrying debt problems forward from one age to the next.

For more details on how to prepare for and avoid debt at each life milestone, tune in to today’s podcast or read the complete transcript below.

Additional Resources

FULL TRANSCRIPT – SHOW 217 Why You Want to Avoid Debt at Every Age

why you want to avoid debt at every age

Doug Hoyes:    Debt problems happen at every age. While the average person who files bankruptcy in Canada is in their mid-40s, we’ve filed bankruptcy for people as young as 18 and as old as 93. In our most recent Joe Debtor Bankruptcy Study; 12% of people were between the ages of 18 and 29, 29% were in their 30s, 28% were in their 40s, 20% were in their 50% and 10% were over the age of 60.

In most cases the trigger for someone to file a bankruptcy or a consumer proposal is an event that was out of their control; a job loss, illness, marital breakdown or other personal catastrophe that caused extra financial hardship. As we said way back in podcast number 80, it’s not always your fault. Having said that though there are ways you can be better prepared to weather life’s financial ups and downs, and that’s our topic today here on Debt Free in 30; why you want to avoid debt at every age and how to do it.

Today’s show is all about practical advice, we’re going to go through each age group and give you our advice on how to avoid debt at each age. To discuss it I’m joined once again by Ted Michalos, so Ted, let’s start with the first age category, 18 to 29. What are characteristics of people in that age group?

Ted Michalos:   Hi, well the most telling thing about this group is that they are just starting out in life, so they’ve probably just finished high school or grade school, whatever they were going to, moving out of their parents’ home and they’re setting themselves up. So, they could be going to post-secondary, university or college, they could be going out to a job, it doesn’t really matter, they’ve got nothing, they’re starting at zero and they have to build something and building things always cost money.

Doug Hoyes:    And by the end of that age group as you get into your later 20s, by then you’ve finished school perhaps or –

Ted Michalos:   Well, a lot of those people transition by their end of their 20s. Maybe they’re into a serious relationship now and they’re, maybe they’re thinking about their first house, they’ve probably bought a car. I mean, there are all sorts of big purchases that come up in your 20s that you have to prepare for.

Doug Hoyes:    Okay. So, let’s go to the practical advice section, we’re doing practical advice on my show. So, what advice would you give someone, let’s say in their, you know, mid to late 20’s or, you know, in that age group.

Ted Michalos:   Yeah. Was it Knute Rockne, that people don’t plan to fail, they fail to plan?

Doug Hoyes:    It’s true, it’s true.

Ted Michalos:   You know, that certain things are going to happen in your life and you need to get ready for them and it’s just a matter of being in charge of your current expenses and income and planning for what you know your anticipated expenses are, and this is so easily said and so hard to do.

Doug Hoyes:    Yeah. And it’s great for us to sit here and say, well you need and emergency fund, you need a budget, you’ve got to do all those sorts of things.

Ted Michalos:   That’s right. We’re both in our 50s, so we can, you know, we can –

Doug Hoyes:    That’s right.

Ted Michalos:   We don’t remember what it was like to be 23 years old –

Doug Hoyes:    We’ll get to that age group and yeah, I mean, if I’ve just finished school, I’ve got a massive student loan.

Ted Michalos:   Right.

Doug Hoyes:    And I’m working at an entry level job, because that’s kind of what you do when you finish school.

Ted Michalos:   Yeah. And you’ve got your first apartment, that you’ve got buy furniture for, you’re driving an old beater or you’re using public transit, whatever to take, there’s, you don’t have anything and you need all this stuff.

Doug Hoyes:    Yeah. And so, it’s great to say start an emergency fund –

Ted Michalos:   Right.

Doug Hoyes:    But you know, you’ve got to be, you’ve got to be covering –

Ted Michalos:   How can you do that?

Doug Hoyes:    Yeah. So, I guess the basic advice would be things like, well you know, keep track of your money as best you can.

Ted Michalos:   Yeah.

Doug Hoyes:    And like you said, live frugally, because –

Ted Michalos:   Well yeah, go back to the wealthy barber, right. Live on less than you’re making, then you’ll always come out ahead, you may not be very entertaining.

Doug Hoyes:    Well, but you have no choice.

Ted Michalos:   Right.

Doug Hoyes:    It’s purely a math question. and of course, we’re big believers in getting out of debt, so if you are young and if you have student loan debt, well whatever you can do to blast away at that, the better.

Ted Michalos:   Well, tell people about the debts that the young people typically have, I mean it’s not the same as our average people, it’s less debt, but it’s more expensive.

Doug Hoyes:    Yeah, exactly right. The average person in that age category 18 to 29 –

Ted Michalos:   18 to 29.

Doug Hoyes:    Has about $29,000 in unsecured debt and as we see as we go through the ages your debt levels increase as you go.

Ted Michalos:   Right.

Doug Hoyes:    However, they are the highest users of payday loans.

Ted Michalos:   And why are payday loans bad?

Doug Hoyes:    Oh, high interest, high interest, high interest.

Ted Michalos:   548%.

Doug Hoyes:    Yeah. The wow –

Ted Michalos:   So, anyway –

Doug Hoyes:    Maybe not quite that, well it depends if it – Yeah, depending on how quickly you pay it back, they can be really high, so.

Ted Michalos:   Let’s not go there.

Doug Hoyes:    It’s, well we’ve done many shows on payday loans, but yeah. And it’s again, not surprising, I’m working at an entry level job, I’ve got my student loan debt, some other debts to pay and I’ve just established my new apartment, whatever, how do I pay the rent, well I’m tempted to go and use a payday loan to close the gap.

Ted Michalos:   You have no credit history, so you can’t get credit at affordable rates, and so you’re forced to the second, third, fourth tier, and the more you use these things the worse it becomes. And so, it just becomes, it’s one of those spirals that drives you lower and lower into trouble.

Doug Hoyes:    So, in a perfect scenario, great I’m starting a savings plan. I’m building an investment account, I’m paying down my debts. But in the typical scenario that we see that’s not the case, because I’ve got a bunch of debt, I’m having to resort to payday loans. So, what advice do you give someone in that age group?

Ted Michalos:   Well, so the most important thing is to be aware of your current circumstances and try to anticipate some of the problems that you’re going to have.

Doug Hoyes:    And so, if you have a bunch of debt and you’re let’s say 25 years old, is bankruptcy an option at that point or is it not an option at that point?

Ted Michalos:   Yeah. Bankruptcy is one of those things that you should always consider if you’re carrying more debt than you can handle, but it’s always the final solution. Probably it makes a lot more sense to talk to somebody about a consumer proposal, where you pay back a portion of what you owe or maybe it’s just you need some budgeting and counselling help. By the time people come to see us, it’s usually too late for that, so reaching out for help and advice, for education and guidance early would be excellent advice to give people.

Doug Hoyes:    So, let’s hit on student loans then.

Ted Michalos:   Yeah.

Doug Hoyes:    Because if I’m 25 years old and I graduated from school two years ago.

Ted Michalos:   Right.

Doug Hoyes:    A bankruptcy or a consumer proposal isn’t an option to deal with the student loans.

Ted Michalos:   That’s right, the law says if you haven’t been out of school for seven years we can’t do anything to settle on student debt. So, if it’s a Canadian student loan, Ontario student loan, whatever it is, you’re going to carry that debt with you even if you file bankruptcy.

Doug Hoyes:    And so, why would someone who’s 25 years old file a bankruptcy or consumer proposal then?

Ted Michalos:   Well, so the typical person probably has credit card debt as well, and in the worst-case scenario they’ve got those damn payday loans and if you have four or five payday loans, you probably owe two or $3,000 just in that, which is more than your take home pay at 23 years old.

Doug Hoyes:    And so, it may make sense to do a proposal or a bankruptcy to deal with all those other debts.

Ted Michalos:   Correct.

Doug Hoyes:    And we’ve seen that happen all sorts of times.

Ted Michalos:   It’s pretty common.

Doug Hoyes:    So, I get rid of all the other stuff, I’ve still got my student loans, but because I’ve gotten rid of the other debts I can service those debts.

Ted Michalos:   Yeah.

Doug Hoyes:    And that’s pretty much all you could do at that age range.

Ted Michalos:   Another segment of this population that I don’t think we want to talk about a lot is the single parents, because that, a number of the folks from 18 to 29 it’s a single parent looking after one or two kids. And I mean, and you know why it’s caused, but it’s not something you can do anything about.

Doug Hoyes:    Yeah. And it’s again, the finances become a very serious issue –

Ted Michalos:   Right, at that point.

Doug Hoyes:    Yeah. There are very few 70 years old single parents, this is obviously something that’s much more preponderance among the young, so.

Ted Michalos:   Right.

Doug Hoyes:    I said that as we get older our situation changes. So, let’s move the clock forward now and look at the 39, the 30 to 49 year old age group.

Ted Michalos:   Okay.

Doug Hoyes:    And so, I said at the start that the most common age for someone to actually file a bankruptcy or consumer proposal is around sort of 44 or 45 in that age range.

Ted Michalos:   Yeah.

Doug Hoyes:    Why is that?

Ted Michalos:   Well, statistically that’s the middle age that people are living to. So, if you’re going to, if the average population’s going to live till they’re 80, so the middle of that’s in their 40s, so that makes sense. But more importantly, because again, there’s likely to be some transition event, something has happened in your mid-40s that’s caused a serious financial crisis that you weren’t anticipating. It might be an unexpected child, it could be an unexpected illness, suddenly you’ve lost your job, a marital separation, I mean there are all sorts of things that can happen to you and when they do, it puts an incredible strain on your finances.

Doug Hoyes:    Well, if you think of someone who’s 45 years old, okay, I probably still have kids who are either living at home or –

Ted Michalos:   They’ll be school age likely.

Doug Hoyes:    I’m still supporting –

Ted Michalos:   Yeah.

Doug Hoyes:    Yeah. And they might be –

Ted Michalos:   One way or another.

Doug Hoyes:    Might be in post secondary, but I’m still footing the bill perhaps.

Ted Michalos:   Yeah.

Doug Hoyes:    My parents are possibly still alive, one or two of them.

Ted Michalos:   Yeah.

Doug Hoyes:    And so, it’s possible that I may even be helping them out if they’re not in great financial situation.

Ted Michalos:   That’s true.

Doug Hoyes:    You know, I certainly haven’t received an inheritance yet, because they’re still alive.

Ted Michalos:   Yeah.

Doug Hoyes:    And I’m not quite in my peak earning years yet.

Ted Michalos:   Correct.

Doug Hoyes:    Because you know, I haven’t risen to the top of whatever the food chain is at work yet, so.

Ted Michalos:   And you’re still carrying lots of debt.

Doug Hoyes:    Yeah. And I may still have not even finished paying off all my own student debt, I’ve, you know, perhaps bought a bigger house, got a bigger mortgage.

Ted Michalos:   Well, that the biggest single transition in that age group, is probably housing. Whatever type of house they have it’s going to be fairly expensive and they’re looking for a size for a family.

Doug Hoyes:    Yeah. Your peak housing needs are when you’ve got the biggest family.

Ted Michalos:   Right.

Doug Hoyes:    When you’re 70 years old, you don’t need a three bedroom house, but when you’re 40 and you’ve got three kids, well then that’s when it’s much more necessary.

Ted Michalos:   So, if you throw in a marital breakdown or you throw in or you throw in some kind of problem at work, you’re you know, your job’s gone to Mexico, you’ve got a real crisis on your hands.

Doug Hoyes:    So, let’s get to the advice portion then. So, for someone in that age range.

Ted Michalos:   Yeah.

Doug Hoyes:    What is the typical advice you would give someone, and not even talking about debt, we’ll get to that, but just, you know, practical advice, I’m in my, you know, my 30s, my 40s, you know. So, obviously continuing to pay down debt, I mean that’s an obvious one.

Ted Michalos:   Yeah. We tell people that all the time. But you need to, I mean we jokingly said you should try for an emergency fund when you’re in your 18 to 20 group, it’s more important in the 30 to 49 group, because you know life is going to throw you a curve ball. and if your solution is to put 20,000 bucks on your line of credit and hope for the best, well that’ll get you through the problem, but it’s created a second problem.

Doug Hoyes:    Well, and there’s more things that can go wrong, so.

Ted Michalos:   Right. And something else will, because they never go wrong at once.

Doug Hoyes:    Yeah. I mean, I’ve got three kids, well one of them is going to need braces, if I don’t have any kids, well none of them do.

Ted Michalos:   Right.

Doug Hoyes:    My car’s more likely to break, my house needs more repairs –

Ted Michalos:   Think of a more typical, you know, something happens at work and you’re either downsized or your position has changed, so now there’s financial stress. That causes pressures on your relationship and so, and in many cases the relationship can’t handle that pressure. So now you’re earning less, you’re in a separation or a divorce and you’re trying to re-establish yourself in a new home. I mean all, it’s a perfect storm of horrible things that can happen to a person and it happens to a lot of people.

Doug Hoyes:    Yeah. And so, obviously preparing for the unexpected.

Ted Michalos:   Yeah.

Doug Hoyes:    And what you’re saying is, it’s not really that unexpected, because when you’re in that age range this is when those kinds of things happen.

Ted Michalos:   It’s when it’s going to happen, yeah.

Doug Hoyes:    It’s when it’s going to happen, so be prepared for that. and like you said, having an emergency fund if at all possible, keeping your debt levels down. Even some basic things like taking advantage of, you know, employer savings programs.

Ted Michalos:   Yes.

Doug Hoyes:    So, if your employer offers to match your RSP contributions or has some other, you know, stock buyback plan or whatever.

Ted Michalos:   So, do it because, I mean if your employer’s matching your contributions, you’re doubling your money, you’re never going to get that kind of return on the stock market unless you’re buying cannabis.

Doug Hoyes:    Yeah.

Ted Michalos:   And you know, we’re not recommending that by the way.

Doug Hoyes:    We’re not recommending it. and the time to do that is when you’re in your 30s and 40s –

Ted Michalos:   Right.

Doug Hoyes:    Not when you’re 62.

Ted Michalos:   It’s too late.

Doug Hoyes:    It’s yeah, you know. And obviously speaking of retirement, well this is the time to really be getting into it, it’s kind of hard when you’re 18 to be worrying about it, but 30 or 40 the sooner you can get into it the more time it’s got to build up.

Ted Michalos:   People aren’t going to want to hear this, but quite frankly think of the word moderation, don’t try to keep up with the Jones’, have realistic expectations of what you need and what you purchase, don’t go out there getting the newest iPhone every week, you don’t have to have an iWatch, you don’t have to have the flashiest car it’s live within your means and some of these problems won’t be as bad when they happen.

Doug Hoyes:    Yeah. And if you, you know, grasp hold of all this stuff, well then in your later years you’ve actually got more money and so it’s, it ends up working out. Now let’s talk about the nightmare scenario here then.

Ted Michalos:   Right.

Doug Hoyes:    The scenario where we see with our clients. so, with our clients, so people who are filing a bankruptcy or a consumer proposal in their 30s, their average unsecured debt is around $47,000.

Ted Michalos:   And the minimum payments on that are about 1,500 bucks a month.

Doug Hoyes:    That’s a big number.

Ted Michalos:   Yeah.

Doug Hoyes:    And by the time they get in to their 40s it’s up to $59,000. So, you can see the progression, the older you are the more time you’ve had to accumulate debt, so therefore the more debt that you’ve got. So, what are, what’s the advice then for someone in that situation? Hopefully, by the time you’re into your 40s the student loan is less of a problem, although we still –

Ted Michalos:   Not necessarily, but hopefully.

Doug Hoyes:    We still see them. So, why are they a prime candidate for something like a consumer proposal at that age?

Ted Michalos:   Well, so in your 40s, you’re at a point where you’ve still got as much life ahead of you as you have behind you and what you’re trying to do is get a reset. So, clean up all of this debt that’s eating up your income every month, so that you can establish a safety fund, you can prepare for tomorrow. And it sounds counterintuitive, but what we’re suggesting is, deal with the problem we have with your finances today, so that you won’t have a problem tomorrow, and compounding interest makes tomorrow’s problem much worse.

Doug Hoyes:    Well, you and I did a podcast two or three weeks ago on joint debts.

Ted Michalos:   Oh, yeah.

Doug Hoyes:    Well, and this is the age group where that’s most an issue, because again you’re more likely to be married when you’re 40 than when you’re 18 or when you’re 80 and as a result, joint debts sometimes become a problem, you know, his debt, her debt, our debt whatever.

Ted Michalos:   Well, and lenders do that on purpose, they’re more likely to, if there’s two of you making money, let’s get both of you to sign for it, so that’s there’s a better chance we’re going get repaid.

Doug Hoyes:    So, let’s roll through then to the next age group, which of course is sort of the –

Ted Michalos:   Which is our age group –

Doug Hoyes:    Yes, that’s our age group.

Ted Michalos:   And nothing bad ever happens in this age group.

Doug Hoyes:    No, no, the 50 to 59 year old age group, which we both happen to be in.

Ted Michalos:   Right.

Doug Hoyes:    I mean, we’re remarkably well preserved I would think, so people probably don’t understand how old we actually are. But the number one priority I think for someone in this age group is, now is when you want to be getting yourself out of debt, you’re closing in on retirement and you’re not there yet, so that’s got to be your number one, your number one objective. What else is someone in that age group thinking about, what should their objectives be? And again, we’ll get to the debt piece in a minute, but just again, general financial advice?

Ted Michalos:   So, most people are going to think that this is the point where you need to be thinking about your retirement, but if you’ve left it this late it may be too late. You can’t be starting an RSP at 55 years old and expect to have any money in there, and in fact you might be penalized for it. So, what you want to start thinking about is, how you want to spend your retirement years and how you’re going to finance them. Are you going to have a pension, are you going to be living on government? Should you be downsizing your expectations on your living surround, maybe the kids are now out of the house, so you don’t need that 4,000 square foot anymore or the 2,000 square foot home. Are you going to need to replace cars before you retire or there? You’re trying to get your expenses in line with what your future is going to be, these are your best years of your life if things have gone well till this point, but things can still go wrong.

Doug Hoyes:    Well, and what you’re saying is you got to be realistic.

Ted Michalos:   Well that, and that’s again, now we’re back to the whole moderation thing, you have to be realistic at every point of your life.

Doug Hoyes:    Yeah. And so, if I’m 59 years old and I want to retire at 62, I’m probably not going to be spending my retirement years on cruises in the Mediterranean. But if I can be chipping away at debt, you know, throwing some money into the bank, then at least I’m setting myself up. Now the other, I think big category, big thing you see at this age and not so much for you and me, but for others, would be having adult children. You don’t have any adult children yet.

Ted Michalos:   I don’t.

Doug Hoyes:    You’re a very young 50+ year old guy, but when you have adult children, it’s very tempting to –

Ted Michalos:   To help them.

Doug Hoyes:    To help them, you know, they want to buy a house, everyone wants to buy a house and of course in this market they can’t do it on their own.

Ted Michalos:   Right.

Doug Hoyes:    What is your advice for whether or not someone should help their adult children?

Ted Michalos:   Yeah. You should, and this is going to sound harsh folks, but you should only help your adult children if you can afford to give the money away. So, you shouldn’t be incurring debt, putting money on your line of credit to lend to your children, who won’t be paying the interest on, but you’ll be paying the interest on. I mean, you’re, what you’re doing is you’re empowering them to live beyond their means and creating unrealistic expectations. So, if you’ve got, you know, money in a savings account that you want to give your children that’s fine, but you really shouldn’t be incurring debt to help your children or your parents for that matter.

Doug Hoyes:    Yes. and I believe that was –

Ted Michalos:   Yeah, a chapter in your book –

Doug Hoyes:    Yeah, and I’m looking page 185 in “Straight Talk On Your Money”, I address some of those very similar themes and I totally agree with you, if you have the cash in the bank and you want to give your kid X number of dollars, fine, so long as it’s not going to influence, you know, or harm your future unduly then why not. Where we see the problems happening is where the parents say, look I’ve got three kids, they all need to get a start in the real-estate market, so I’m going to go out and borrow $50,000 for each of them to give them some money towards a down payment. Okay, well now you’ve just taken on a whole bunch of debt.

Ted Michalos:   Right.

Doug Hoyes:    And if your kids aren’t able to pay you back, because one of those life events that we just talked about that are most common in the 30s or 40s happen, now not only are your kids in trouble, but now you’ve really harmed your future too, so.

Ted Michalos:   Right.

Doug Hoyes:    Frankly, I’m a big believer in what you said too, even though it is harsh, the answer is, you know, help people out with whatever cash you’ve got.

Ted Michalos:   Right.

Doug Hoyes:    And you know, if you want to help by babysitting your grandchildren and things like that, that’s fantastic too.

Ted Michalos:   Yeah.

Doug Hoyes:    But otherwise, don’t be throwing out, don’t be loaning out any money that you don’t have – In fact, my advice in the book is don’t loan money to friends or family at all, give them money if you really want to help them out.

Ted Michalos:   Right.

Doug Hoyes:    And then there’s no expectation of repayment. So okay, let’s get into the scenarios we see most commonly then with people in this age group then. So, the average debt of someone on their 50s that we help is $63,000. And again, I’m talking unsecured debt, I’m not talking mortgages, car loans; I’m talking credit cards, –

Ted Michalos:   Right, credit cards, lines of credit, payday loans –

Doug Hoyes:    Payday loans, income taxes, that sort of thing.

Ted Michalos:   Yeah.

Doug Hoyes:    And we’ve also in the past seen a lot of people who tap into their home equity.

Ted Michalos:   Oh I, yes.

Doug Hoyes:    So, HELOCs for example, well I want to loan money to my kids, so what do I do, my house has gone up in value, I’m going to get a second mortgage, a secured line of credit, something like that.

Ted Michalos:   Right.

Doug Hoyes:    And as a result, they’re putting themselves into debt. Credit card debts, lines of credit, we already mentioned what they all are. So, what is your advice then for someone in that situation, it sounds to me like once again this is a prime consumer proposal candidate.

Ted Michalos:   It is. the biggest mistake that we see folks in their 50s, you know, the 50s to 60 year old ages, is that they don’t clear up their debt so when they hit the retirement in their 60s, they’re carrying all this debt they can’t afford. So, even though it sounds drastic to be thinking about a consumer proposal or even bankruptcy, although that’s unlikely a proposal’s more likely, it’s better to clean up your debt now, so that ten years from now you can retire debt free and have a reasonable expectation for a lifestyle when you are retired.

Doug Hoyes:    And you already explained what a consumer proposal, it’s a deal where you make payments over a period of time; the beauty of doing that in your 50s is, you’re still working.

Ted Michalos:   Right.

Doug Hoyes:    You still have a job, hopefully, you still have an income, so it’s, you’ve got the most amount of debt, but it’s also you’ve still got the ability to actually make some kind of a deal.

Ted Michalos:   I mean, your 50s should be the time in your life where you’re in your best financial position and that doesn’t apply to everybody, because they’re, sickness comes in, you could lose your job, you could get divorced; things happen. But 50s, between 50 and 60 is when you’ve got to get your ducks in a row for between 60 and older.

Doug Hoyes:    Yeah. You’re setting yourself up for retirement. Well okay, so let’s talk about the 60+ years, which are leading into retirement and after retirement.

Ted Michalos:   Yeah.

Doug Hoyes:    So, the biggest change, well you tell me, what’s the biggest change when I go from working to becoming retired?

Ted Michalos:   Right. The biggest single change is that your income drops dramatically and you don’t adjust your lifestyle to compensate for it.

Doug Hoyes:    Yeah, because the amount of Cornflakes you eat in the morning is the same whether you’re going into work or not. Now, there’ll be some expenses perhaps, you know, I don’t drive my car as much, I don’t need to buy a new suit every year for work, whatever. But your basic living expenses; your rent, your mortgage isn’t going to change just because you stopped working.

Ted Michalos:   Right.

Doug Hoyes:    So, your income in most cases drops.

Ted Michalos:   Yeah, even if you’ve got a great government pension, it’s still going to drop 20%.

Doug Hoyes:    That’s what a pension is, and most cases, most of us don’t have a great government pension, so our income –

Ted Michalos:   That’s right, it’s all I have –

Doug Hoyes:    Yeah, it’s dropping considerably, so unless you’ve got a lot of savings you can draw on, your income goes down, but your expenses remain the same. And some expenses actually go up, maybe you’re not covered by the company health plan anymore.

Ted Michalos:   Well, and it’s worse than that, some people spend more, because now they’ve got more free time.

Doug Hoyes:    Take up a new hobby.

Ted Michalos:   That’s right, they’re looking, they’ve got to find things to fill their day and so they spend money doing that.

Doug Hoyes:    So, your advice to someone, and again we’re going to talk about debt in a minute, but your advice to someone in that age range is what?

Ted Michalos:   Well again, so we’ve said this repeatedly, you have to have realistic expectations of what your lifestyle’s going to be. Recognize that when you were working full-time, okay I can afford to go to dinner one night a week or two nights a week, whatever it was you and your family were doing, now that you’ve retired you’ve got a fixed income, it’s not going to go up very quickly and it’s less than you were making before, you have to adjust your expenses accordingly.

Doug Hoyes:    And maybe the answer is, great, I’ll learn to cook at home and bring lots of people over and it’s great.

Ted Michalos:   Yeah. I mean, part of the frustration of this is a third of Canadians retire with great money, they’ve got lots of assets, lots of wealth; a third are living paycheck to paycheck, so they’ve got a problem making the adjustment; a third are already in trouble and they’re going to end up talking to somebody like you or I.

Doug Hoyes:    And that’s what we’re going to talk about. And I guess the other thing when you think, okay I’m 60 years old, well if you live to 80 or 90 –

Ted Michalos:   Which you probably will.

Doug Hoyes:    Which you probably will, you’ve still got, you know, 30 40 years left on the clock.

Ted Michalos:   Yeah.

Doug Hoyes:    You’ve got to be thinking about things like, well what about long-term care, I mean at some point I’m not living in my house anymore, those are kind of things you’ve got to be thinking about as well.

Ted Michalos:   Yeah.

Doug Hoyes:    So okay, let’s talk about the people who come in to see us, again they’re 60 years and over, their average debt is over $64,000.

Ted Michalos:   And I don’t know if the people listening or watching have noticed, every decade the debt’s gotten larger, which is, I mean it’s not okay, but it’s understandable. 20 to 30 year olds, it’s so much, then 40, then 50 then 60, we’re now over 60. It’s the highest level so far, but you’re also now back to lower income levels. So, we’ve gone full circle with your income, you’ve built a career, you’ve now stopped making money, you’re on a pension or some sort of assistance and you’ve got the most debt.

Doug Hoyes:    Yeah, it’s a deadly combination. And you’re right, the 18 to 29 year old range was around 29,000 in debt.

Ted Michalos:   Yeah.

Doug Hoyes:    Then by your 30s it’s 47,000 and 50s it’s 59,000.

Ted Michalos:   Now we’re into 63 or 64.

Doug Hoyes:    Yeah, 63 when you’re in your 50, 64,000 by the time you’re 60 and over. And again, we’re talking about people who actually come in to file a bankruptcy or a proposal with us.

Ted Michalos:   Right.

Doug Hoyes:    You’re a third of the population has tonnes of money

Ted Michalos:   And that’s not who we’re talking to –

Doug Hoyes:    And they’re in great shape and that’s good.

Ted Michalos:   Yeah.

Doug Hoyes:    So, you’ve got lower income, but you’ve still got this massive debt, so are we still doing proposals for people over 60 or are we now into the bankruptcy scenario?

Ted Michalos:   Well, so now, it becomes a decision of what can you afford to deal with this problem. So, if your income when you’re over 60 years old supports paying back a portion of the debt, then we still counsel that you consider doing that. But it may be that a bankruptcy makes more sense.

Doug Hoyes:    Yeah. the typical senior who’s doing a proposal has an income obviously.

Ted Michalos:   They’ve got decent employment pension so some description, plus some government money, so bankruptcy might actually be too expensive. I know that sounds counter-intuitive, but the cost of bankruptcy is based on your income.

Doug Hoyes:    Yeah, the more you make, the more you’ve got pay.

Ted Michalos:   So, there are times where it makes more sense to file a proposal to pay less per month for a longer period of time.

Doug Hoyes:    And so, why is it that we see a lot of people who retired in the last year or two who have tax debt? they never had tax debt their whole life, they weren’t self-employed or anything like that, and now they’re retired and yet they owe the government money. How is that even possible?

Ted Michalos:   Well, and so in a lot of cases it’s because they have pensions from more than one source. And so, a pension plan naturally only taxes you at the lowest possible rate, because they want you to have as much money every month as possible. Well, if you’ve got two pensions and they’re both doing that probably they’ve jumped into a higher bracket.

Doug Hoyes:    Yeah. But pension number one only knows about itself, so it says, oh well, based on this income you’re in the 20% bracket, the other guy says the same thing. Maybe you got a little bit of a part time job, maybe you’re getting some CPP, some OAS whatever, you add it all up, no you’re actually in the 35% tax bracket.

Ted Michalos:   It doesn’t take much to bump you.

Doug Hoyes:    And you’re not paying enough.

Ted Michalos:   Right.

Doug Hoyes:    So, I think we’ll close with that piece of practical advice, that if you are a senior, before you retire crunch the numbers on what your tax liability is likely to be and make sure you’ve set aside enough to deal with that.

Ted Michalos:   Well, and take it a step further, so if you’re going to have multiple pensions, make one of them your designated tax payer. So, if you’ve got a government pension increase the amount the tax they’re taking off at source, so you don’t need to worry about this. And taking a little bit off every one of your pensions will drive you crazy, just pick one that is going to deal with this problem.

Doug Hoyes:    Yeah, and it’s not that hard to phone up either the CPP people as Service Canada or your company pension or whatever and say, okay I know the calculation says you’re supposed to be taking off 300 bucks a month, make it 450.

Ted Michalos:   Right.

Doug Hoyes:    And then I’m good and it’s not a horribly hard calculation to do, you just take last year’s tax return and punch in all the new numbers for this year, it’ll give you a rough estimate of where you need to be.

Ted Michalos:   And if you’re going to make a mistake, be conservative, add an extra 50 or 100 bucks, because you’ll get the money back.

Doug Hoyes:    Well, and also when you retire, it’s not totally uncommon to have some kind of retiring allowance or get some kind of severance or some extra little bump.

Ted Michalos:   Pay out your sick days, if you work for the government.

Doug Hoyes:    That’s right, yes, we won’t get into that discussion either, but there can be many things that can bump you into a higher category, so you’ve got to be –

Ted Michalos:   That’s right.

Doug Hoyes:    You’ve got to be careful about that. So, I guess your advice was kind of the same all the way throughout –

Ted Michalos:   You’ve got to have a plan, you’ve got to live with your means and you need to be careful, the only person who cares about your finances is you. If you’re expecting somebody else to look after you, you’re probably making a mistake.

Doug Hoyes:    Yeah, they’re not going to do it, so yeah, look out for yourself. And if you find yourself in serious debt problems regardless of what age you are, reach out for help

Ted Michalos:   That’s right, talk to a professional, it doesn’t have to be Doug or I, although we’d certainly appreciate that, but if you have a problem with your tooth you go see the dentist, if you have a problem with your money or with your debts you should see somebody specialised to deal with your debts.

Doug Hoyes:    Because that’s what we’re here for and we obviously are familiar with dealing with all different age groups.

Ted Michalos:   That’s right.

Doug Hoyes:    Excellent, thanks very much Ted, that’s where we will close it. So, here’s the point, you know, we face different challenges at different stages in life, that’s really what we’re saying. You know, as a young person maybe you’re more likely to be dealing with student debt. You know, in the family years you’re supporting your kids, perhaps you’re also helping your parents. Pre-retirement, your income hopefully is at its highest, but that’s what, you’ve got to also be focusing on eliminating as much debt as you can. And then as we said, by the time you retire your income drops, your expenses don’t drop by as much, so you’ve got the challenge of living on reduced income. And so, that’s why we went through each different age group and hopefully we’ve given you lots of practical advice to deal with each particular age and each of life’s stages. We’ve covered a lot of ground on today’s show, so please go to hoyes.com, that’s H O Y E S .com, where you can find show notes with a full transcript of everything we’ve discussed today.

So, until next week, for Ted Michalos, thanks for listening. I’m Doug Hoyes, that was Debt Free in 30.

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