By Doug Hoyes
Most people I meet with are truly surprised at just how much debt they have accumulated. They didn’t go out yesterday and borrow that much money, but it did come from somewhere.
The truth is that debt tends to follow a pretty predictable timeline. Most of life’s major milestones — from high school graduation to retirement — are associated with some financial commitment. Debt left unpaid grows, and quickly. Along comes the next stage in your life, and the need for more debt.
Piling new debt on top of old is what causes many people to find themselves facing bankruptcy. If you’re not properly prepared, you, like many of my clients, may find yourself suddenly battling more debt than you can repay.
Let’s take a look at the major life events that could cost you a lot more than you bargained for, and how you should properly manage the debt you do decide to take on.
High School Graduation
With a freshly minted diploma in hand, most high school graduates choose one of two paths: They enter the workforce right away, or they head off to college or university to continue their education. That decision in itself will directly impact their future debt and earning potential.
Whatever they decide to do, many choose this time to apply for their first credit card in order to support the financial pressures of adulthood such as buying groceries, paying bills, and buying a car. It’s an all-too-common scenario — as many as 73% of young Canadians aged 19-34 hold consumer debt.
Having a credit card this young is not necessarily a bad thing. The trick is to learn that credit cards should be payment mechanisms — not borrowing options. Keep your initial credit limit low, well within your ability to repay in a month’s time. This will ensure that you are always able to pay off your credit card balance in full every statement period.
Financing higher education is more expensive than it’s ever been. Students who can’t pay for tuition on their own must seek out a loan, whether from a bank, family members, or the government. This means that most college students graduate with some debt. In Ontario, for instance, the average student graduates with $26,500 in student loan debt, which will take them 10 years to pay off.
Is all of that debt is even worth it? Studies have shown that the average university student earns $1.4 million more than a high school graduate over a lifetime. In other words, that investment early in adulthood does have the potential to pay off significantly during the next phase, which is…
Getting a Job
Whether you’ve just graduated high school or you’ve got eight years of higher education under your belt, getting your first real job is a major financial milestone. Although your salary level can definitely impact your ability to manage your finances, a high salary doesn’t necessarily guarantee a debt-free life.
An attorney with a six-figure salary can just as easily fall into the debt trap as a journalist who makes $30,000 a year. Learning to save and spend within a budget is crucial to maintaining good financial health. Don’t forget to budget for any work-related investments, such as a new car or wardrobe.
Also, now that you are working, start paying off any student loans right away, before your lifestyle catches up to your new salary. You lived like a student for quite a while — if you can continue to do so for a little longer, you can get that student loan debt under control before…
Finding your life partner is certainly something to celebrate, but if you’re not careful, it can put a real crimp in your finances.
In Canada, 43% of married people begin their relationship with debt, with $21,503 being the average amount. And this is debt brought into the marriage, and doesn’t even count the cost of the wedding.
Don’t go overboard planning a fancy wedding and honeymoon, especially if you have to pay for it with more credit card debt. Whatever the cause of the debt, it can directly impact plans to buy a home and start a family, both of which require significant savings.
Buying a Home
For most people, a house will be the biggest purchase they ever make. And a first home purchase requires serious financial preparation.
Home ownership involves a lot more than just the purchase price of a home, with money needed for a good down payment as well as ongoing costs such as insurance, repairs, utility bills, property taxes, and more.
Then there’s the added cost of new furniture, updated appliances, tools, and more. A high-ratio mortgage, followed by additional credit card debt, is a direct road to bankruptcy. Buy within your means. In fact, it’s even better to buy smaller so you are prepared for…
Starting a Family
Kids are cute — and expensive! Between the costs of housing, childcare, education, and extra-curriculars, having children will significantly increase your household budget.
The total cost of raising a child to the age of 18 is estimated to be around $670,000. Time off of work can also be costly, particularly if one parent decides to stay home to take care of the kids. Because of these reasons, 50% of household debt is held by families with kids.
Once you start a family, rebalance your budget. What you used to spend on entertainment will have to be diverted into child care. You can’t likely keep up both without adding to your debt load.
Unfortunately, no one is safe from the threat of losing a job. Downsizing and staff shakeups happen everywhere, and often when we least expect them.
Mortgages, debt repayments, and living expenses don’t stop when the paychecks do, so while you search for a new job, you may need to restructure your debt before it becomes an even bigger problem. Thirty-nine percent of people become insolvent due to unemployment, which is why it’s recommended that you have an emergency fund in case of unexpected events such as this.
Getting a Divorce
It’s a sad fact that many marriages end in divorce, and 18% of Canadians report that a divorce or separation was the cause of their insolvency. In fact, 28% of people who file for bankruptcy are divorced.
Ending a marriage is certainly not cheap, and it’s more than just the lawyer’s bills. You will have to maintain two living arrangements (yours and your ex-spouse’s) and may have to pay child support. Any debt owed by both spouses (called joint debt) will have to be taken care of or it will follow you. Unlike assets, joint debts can’t be split up in a marriage. If your ex-spouse doesn’t pay, the bank will still look to you for payment.
Retiring From Work
We all like to imagine enjoying our golden years worry-free, but if you don’t take care of debt while you’re still working, it will follow you into retirement.
At the same time, if you don’t properly prepare for living on a fixed or reduced income, you could find your debt increasing at a rapid rate. You must start early to fund your retirement and deal with unexpected costs due to health issues. And it’s equally as important to make sure you’ve paid off any high-cost debt like credit card debt long before you plan to retire.
Even your mortgage should be reduced, although with today’s low interest rates, many are tempted to lengthen their mortgage term. The risk with that approach, however, is that illnesses happen more often when we are older. If you have no debt, including mortgage debt, it’s easier to weather the financial storm of medical costs. The fact that many are not prepared is the reason seniors are one of the fastest-growing population groups dealing with insolvency.
Knowing what you’re up against at every stage of your life is an effective way to defend against debt. As you can see, debt can continue to accumulate and overwhelm you if you’re not careful. Challenge yourself to tackle each new milestone responsibly, and you’ll be well on your way to a financially fruitful life.
Doug Hoyes has extensive experience resolving financial issues for Canadian citizens. A Licensed Bankruptcy Trustee and co-founder of Hoyes, Michalos & Associates, he is also a Chartered Professional Accountant (CPA), Chartered Insolvency and Restructuring Professional and Business Valuator. He regularly comments on a variety of TV, radio, and other media outlets on topics surrounding bankruptcy and writes a column for the Huffington Post. Hoyes has been a Licensed Trustee since 1995 and testified before the Canadian Senate’s Banking, Trade, and Commerce Committee in 2008.