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Praise for When Life Bites You in the Wallet It s not often I learn several new things from a personal finance book but this one manages to make an old topic seem fresh In fact it s given me multiple story ideas for MoneySense Jonathan Chevreau editor of MoneySense and author of Findependence Day We are headed into an age of income inequality and the rich will be the people who saved the most not those who earned the most When Life Bites You in the Wallet helps make sure you are on the right side of the divide Linda Nazareth author of Economorphics The Trends Turning Today into Tomorrow Excellent fact filled analysis of the implications of our debt saturated society with lots of easy to understand practical advice to escape the debt trap J Douglas Hoyes CA Trustee Co founder Hoyes Michalos Associates Inc Stay away from most debt Five four letter words that summarize Davies and Mantin s fulsome exploration of personal debt in all stages of life When Life Bites You in the Wallet makes you step back and re examine your relationship with money and credit and shows you how powerful it is to be in charge rather than a slave to it You ll learn how to become truly independent by not being constantly shackled by debt This book will help you get back on the road to freedom Fred Kirby CFP Financial Investment Newsletter Writer

Taking Control of Your Finances

Contents Who We Are ix Easing In xi PART ONE Looking in the Mirror 1 1 Losing Control 3 2 Credit Binging 5 3 More Financial Industry Jargon 13 No PART TWO The Lure of Debt 17 4 Debt Is Big Business 19 5 Living with Uncertainty 23 6 Impulse Buying 27 7 Keeping Up with the Joneses 31 8 Does Good Debt Really Exist 35 9 Debt Is Not Equity 41 10 Real Estate The Sacred Cow of Debt 45 11 Signs of Bad Debt 51 12 Debt by Another Name Overdraft 53 PART THREE Life s Curve Balls 57 13 Lifestyle Changes 59 14 Paying Bills on Time Is Not Good Enough 65

viii WHEN LIFE BITES YOU IN THE WALLET 15 It Ain t Love Honey 71 16 Relationship Split Ups 77 17 Pre retirement and Investment Fraud 81 18 Retirement and Regret 85 19 Getting Sick Going Broke 91 PART FOUR Financial Responsibility at All Stages of Life 99 20 Managing the Bank of Mom and Dad 101 21 Parenting Your Way to the Poor House 107 22 Middle Aged Spread 111 23 Living Apart Together 115 24 Shop Till You Drop Death and Debt 119 25 Getting and Keeping Your Fair Share 123 26 Those Bag Lady Fears 129 27 The Future of Debt The Next Generation 133 PART FIVE Taking Action 137 28 Identifying Your Financial Problems 139 29 Finances and Health 143 30 Guilt and Shame Are Not the Same 147 Some Final Thoughts 151 Index 153

Easing In WHEN LIFE BITES YOU IN THE WALLET is intended to help you think about money and specifically debt in a new way Based on the low savings rates and the high debt levels of so many people we believe that this book is timely and important We also know that reading financial books can be boring so we want to ease you into considering financial issues in your life By providing stories about financial challenges at various life stages we hope to help you avoid additional stress about money If you are already feeling the pressure from finances we want to help you find solutions If there are people in your life who you think are going off the financial management rails and placing themselves at financial risk this book can help you have that difficult conversation For those of you who have been able to manage your finances in a way that lets you sleep easily at night this book is to keep you in great financial shape The information and stories1 we are sharing are about those of us moving through our lives without a depth of interest or knowledge in money matters who through unexpected circumstances poor decision making or even These stories are composites and artifacts of insolvency and bank1 ruptcy cases but identifying information has been changed or points have been enhanced in order to highlight areas of key concern

xii WHEN LIFE BITES YOU IN THE WALLET due to manipulation find themselves bitten by financial difficulties Some are in a constant state of anxiety over money Some even find themselves at the door of a bankruptcy trustee This is a door they never expected to walk through In fact most will look over their shoulder as they walk through the door because they feel it is a shameful secret they do not wish their friends or colleagues to learn about Each chapter in this book is brief Each chapter focuses on a single life event or life stage that typically involves finances We suggest you begin by looking through the chapter titles and begin reading the chapters that shout out to you Each of us has unique life challenges including financial challenges We are human and we each make mistakes or decisions that in hindsight were not the best choices for us or our families The good news is that financial problems do not have to persist indefinitely There is always a chance to reset the system and start over doing things differently We recognize that life is complex and brings many challenges and we hope you find When Life Bites You in the Wallet both informative as well as supportive of your needs

PART ONE Looking in the Mirror It s time to get real with our debt Many of us live beyond our means We need to recognize the difference between a want and a need For some of us this will be a tough exercise because the act of spending money is like a drug helping us feel good but only for a while 1 However as summed up in the book Affluenza discussing increasing obsessions with money and material consumerism The problem is not that people own things the problem is that things own people 2 We ll present some statistics that will show you that you are not alone in your indebtedness You ll get clear on the terminology and how you ve had help to get to this place And you ll see that indebtedness is wreaking havoc with more than your finances But before you can make the move to clean things up you need to own it and to acknowledge that there is a problem So let s get started 1 M Leong Spending Problem Blame it on Your Brain Financial Post January 23 2013 at business financialpost com 2013 01 23 is yourbrain high on spending trick it into saving C Hamilton and R Denniss Affluenza When Too Much Is Never 2 Enough Australia Allen Unwin 2005 Chapter 1 What is Affluenza p 21

6 1 Losing Control THE PRIDE AND POWER of being able to look after our selves is universal We see this in very young children striving for the autonomy to put on their shoes or to feed themselves As we move toward more independence from our parents an important stage in our self sufficiency is our ability to save our own money and purchase goods we prefer Eventually as most parents hope we learn to make our way in this world as contributing adults from renting our first place to supporting a family to buying gifts for others and many other acts that taken together define us as financially responsible From this full independence we gain self esteem This sense of pride continues throughout life which explains why the control and management of money is fundamental to the aging adult s sense of independence If an older adult experiences health issues and needs to rely on others for various types of care they are reticent to give up control over their financial matters To give up control of one s money is to lose control over one s life Losing

4 WHEN LIFE BITES YOU IN THE WALLET control of money for older adults is even worse than losing one s eligibility to drive It is the ultimate loss of autonomy If you are finding yourself in financial trouble you are likely feeling a loss of control and a sense of powerlessness Consider yourself lucky that you are aware of your financial situation before a crisis occurs The crisis that puts you over the edge could be financially driven but it also could be a health family or employment crisis that results in severe pressure on your finances At this moment you may not understand how you got to this point but you can give yourself some Take control of applause for not being in total denial the financial beast about your situation we call debt Notice that we used the phrase total denial because you are probably at some level of denial about your financial situation You may not be willing to admit that some of your habits increase your risk of unmanageable debt You may be unaware of how some lifestyle choices selection of friends social activities and your need for status symbols1 affect your financial situation Know that you are not alone You are among many individuals experiencing high levels of financial stress your family members friends work colleagues and neighbors By gaining more insight into how you got to this place you will begin to take control of the financial beast we call debt 1 Status symbols are referred to as items conspicuously consumed in order to improve our social standing See Jacqueline K Eastman and Jun Liu The impact of generational cohorts on status consumption an exploratory look at generational cohort and demographics on status consumption Journal of Consumer Marketing Vol 29 Issue 2 2012 pp 93 102

6 2 Credit Binging LOOK TO YOUR LEFT Look to your right Very few people have escaped this country wide credit binge By the end of the year 2012 the debt to income ratio for Canadians reached 165 1 What this means is that for every 1 earned the typical Canadian household owes on average 1 65 The United Kingdom in 2008 had the highest debt to income ratio of any G 7 country reaching 172 2 but has since brought its level back to 143 still a very perilous level for individual households 3 Many Americans are also in a financial abyss with 76 living from one paycheque to the next with no financial safety net if the unexpected occurs 4 A snapshot from the Organisation for 1 See www statcan gc ca daily quotidien 130315 dq130315a eng htm HPA under the section on Sector Analysis Household Analysis 2 British household debt is highest in history see www telegraph co uk finance 2792372 British household debt is highest in history html 3 See www resolutionfoundation org media media downloads Closer_ to_the_Edge_ _Extended_version pdf 4 Seventy six per cent of Americans are living paycheque to paycheque see money cnn com 2013 06 24 pdf emergency savings index html

6 WHEN LIFE BITES YOU IN THE WALLET Economic Co operation and Development OECD in Figure 1 using data from 1999 to 2010 shows the growth of extreme household debt in these three countries 5 For many of us this is of little concern because we are continuing to pay our bills and manage our personal financial situations At least that s what we believe right now The accumulation of stuff does not increase life satisfaction except maybe for the rush felt after the purchase before reality sets in Instead we chase the money or more accurately the stuff that we purchase with someone else s money And this makes us a gerbil on an endless wheel unable to get off because it is no longer our wheel and we no longer make the rules about how we will live our lives Canadian household credit growth is slowing from a high in 2007 of 12 to a new low of 3 8 by mid 2013 see Figure 2 This must mean that we are managing things After all our debt burden isn t increasing as quickly as it had been and credit delinquencies in Canada are low Trans Union Canada indicates that as of November 2012 Canadians are continuing to honour their debt obligations 6 Also according to the Office of the Superintendent of Bankruptcy Canada personal bankruptcies have decreased 8 7 between December 2011 and December 2012 7 So everything must be okay right Wrong 5 OECD Factbook 2013 OECD Publishing household debt at 10 1787 factbook 2013 table69 en 6 See newsroom en transunion ca manual releases 2012 TransUnion Personal Debt Levels Balloon to Highes 7 See www ic gc ca eic site bsf osb nsf eng br03016 html tbl2

Credit Binging 7 Figure 1 Change in Household Debt Debt of households and non profit institutions serving households as a percentage of gross disposable income 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Canada 110 9 109 8 111 1 113 9 117 3 120 9 125 9 128 6 134 1 137 9 144 5 146 5 United Kingdom 108 5 111 7 115 7 127 3 138 1 151 3 153 9 166 2 172 2 169 0 162 0 157 0 United States 99 2 100 5 104 2 109 0 116 5 123 0 129 9 134 0 136 4 127 8 128 5 122 5 Source OECD Factbook 2013 at 10 1787 factbook 2013 table69 en First off it s useful to compare the magnitude of growth in household debt against our ability to pay down this debt i e our wages Statistics Canada reports that the growth in household earnings for the middle 60 of income earners has had a steady decline see Figure 3 Figure 2 Growth in Credit 14 12 10 8 6 4 Total Household Credit Residential Mortgage 2 0 1 1 98 7 1 99 1 1 01 7 1 02 1 1 04 7 1 05 1 1 07 7 1 08 1 1 10 7 1 11 1 1 13 Source businessincanada com 2013 11 18 chart household debt bank of canada Percentage Change Year over Year April 2012 Tightening Bias Installed

8 WHEN LIFE BITES YOU IN THE WALLET Figure 3 Growth in Household Earnings Source www hrsdc gc ca percentages calculated by authors from data provided by source When comparing the anemic growth in real wages ranging from 0 1 to 3 2 with the slowing growth in household debt which was 3 8 in 2013 the lowest value in years one can conclude that all is not well In addition the highlighting of low delinquency rates as an indicator of the consumer s financial health is even more misguided Bankruptcy trustees meet with many who are incredibly indebted but by moving money around from one card to another they never get captured in the default rate8 publicized by credit rating agencies As many as 70 of bankruptcy filings are made by people with strong credit Default rate is defined by Bankrate com s Doug Whitman as blowing 8 it as a borrower View video at www bankrate com finance video credit debt what is default aspx

Credit Binging 9 scores according to TransUnion 9 That is they go straight from seemingly perfect credit never missing payments to bankruptcy or a consumer proposal and end up bypassing the delinquent stage altogether Perhaps in the past when credit availability was tighter it was a tough slog to try to use one card to pay another Today it has never been easier For some consumers they are so scared of even a single collection call that they move money around on credit for years before finally making the appointment to see a bankruptcy trustee and getting their financial house back in order That s a lot of sleep they re missing worrying about credit problems instead of seeking assistance Credit binging also means that people have less ability to obtain credit because they have used up most of their available room In these situations the formula banks use to calculate available credit will indicate too much risk This means if we require credit in order to complete the purchase we are less likely to receive credit approval By binging on credit Canadians are we have used up our future opportunot a happy bunch nity to purchase something If there according to a is a proverbial fire sale on something few indicators such as housing most of us will be Is it the debt unable to take advantage of the great deals because we have no credit room remaining Great deals on an asset class such as housing will also mean that our net worth may be shrinking because 9 J Greenwood and M Leong Suddenly Bankrupt People with Great Credit Scores are Hurtling into Crisis Financial Post May 25 2013 at business financialpost com 2013 05 25 suddenly bankruptpeople with great credit scores are hurtling into crisis

10 WHEN LIFE BITES YOU IN THE WALLET our house is worth less What a frustrating situation We see a great deal and we cannot take advantage of it We experience a decline in net worth because we are too invested in a single asset class This increase in personal debt levels may not be worth the added stress to our lives Canadians are not a happy bunch according to a few indicators The Canadian Index of Wellbeing at the University of Waterloo measures eight key areas of life It shows a 24 drop in happiness between 2008 and 2010 10 even while gross domestic product GDP shows increases The OECD has a new measure The Better Life Index 11 This index measures important areas in the lives of 36 countries citizens Canada measures well in most areas but some of the results indicate an unstable financial foundation The measurement of job security 12 which indicates the percentage of those with permanent or long term contract jobs shows Canada ranking 27th out of 36 countries with 11 26 experiencing job insecurity For comparison purposes the U S ranks at number 28th with 11 38 insecurely employed and the U K ranks 5th with 6 83 insecurely employed The Canadian and U S job security scores are worrisome The income measures on the OECD Better Life Index13 indicate more worrisome trends in inequality of disposable incomes Out of 31 countries measured the U S ranked 28th while Canada and the U K ranked 19th and 22nd 10 Canadian Index of Wellbeing see uwaterloo ca canadian indexwellbeing website accessed November 7 2013 11 See www oecdbetterlifeindex org 12 See www oecdbetterlifeindex org topics jobs 13 See www oecdbetterlifeindex org topics income

Credit Binging 11 respectively These are very low rankings and suggest that some people are unable to keep up with their standard of living due to lagging income increases Household financial wealth also indicates a huge spread between the numberone ranked country the United States with an average of 115 918 USD per household compared to Canada at 63 852 USD ranked 7 36 the U K at 62 965 USD ranked 8 36 and the OECD average of 40 516 USD each showing a negative trend since 2006 Another report from the OECD examining the effects of the global financial crisis on poverty and inequality identified Canada as one of only three countries Poland and Turkey are the other two that experienced more than a 2 increase in poverty levels of seniors 14 Canada s proud track record in implementing income support programmes for seniors had an excellent reputation for reducing poverty from 26 1 in 1979 to 5 2 in 2009 15 Excellent standing that is until just recently This could be foreshadowing more financial gloom for indebted baby boomers who are inching into their senior years These statistics are cracks in our financial foundation that are likely to widen as more debt is consumed It s interesting to note that we did not fall into this hole of debt without a lot of assistance from retailers financial institutions real estate companies and even government Indeed consumer spending has been continually relied upon to kick start the economy after both 14 Crisis Squeezes Income and Puts Pressure on Inequality and Poverty at www oecd org els soc OECD2013 Inequality and Poverty8p pdf 15 Income in Canada 2009 Tables 202 0802 and 202 0804 Ottawa Statistics Canada Catalogue No 75 202 X

6 3 No More Financial Industry Jargon OUR INTENTION has been to produce a useful book by writing clearly without jargon But this is not easy The financial industry along with most other areas of our lives is full of industry jargon three letter acronyms TLA s and silly catch phrases Let s face it in some organizations if you don t use the jargon you are not going to be considered knowledgeable However we re going to take the risk that our plain approach to discussing financial pressures social expectations and debt is the best approach for most people So without any secret sauce any attempt to stakeholder or socialize our approach we hope this will resonate with you You might prefer to start with the low hanging fruit but don t avoid those stretch goals Before we start we d like to eliminate from your mind a few commonly used phrases in the financial industry We need you to be open to change and these common phrases and terms may be roadblocks

14 WHEN LIFE BITES YOU IN THE WALLET 1 Fixed Versus Variable Costs These terms typically arise during budgeting activities In order to create a household budget it is necessary to understand where your money is spent Budgeting requires acknowledging regular fixed costs such as utilities food transportation and mortgages and variable spending such as clothing and leisure costs A budget review can be useful in identifying areas where there can be quick modifications to your lifestyle that result in immediate money savings The reality is that there are no mandatory costs In simple terms fixed costs aren t really fixed There is no

No More Financial Industry Jargon 15 cost in your life that cannot be changed Some people will reach a point in their financial lives where they will be forced to change because they are insolvent1 or need to file a consumer proposal or to declare personal bankruptcy Most of us will not reach these unfortunate financial points However in order to get control over your finances you need to be open to changing just about anything in your life There are no sacred cows ouch a clich 2 Needs Versus Wants The distinction between those things we need versus those things we want is a result of our consumptiondriven lifestyles Many of us seem to feel that it s acceptable to purchase anything we desire Impulse shopping is especially hazardous to personal finances Shopping has become a sport for some people And online shopping is an extreme sport for others We believe it is far too rigid to suggest that people should only purchase those things they need We like the balanced approach suggested by financial expert Alison Griffiths whose seven truisms about money include 2 Don t spend more than you make and Spend on what you love if you re going to spend your hardearned dough doesn t it make sense to really care about what you buy Though your purchases may rank as To be insolvent means to owe at least 1 000 and to not be able to 1 meet your regular payments as they are due to be paid See more at www sands trustee com faq what is bankruptcy 2 Alison Griffiths On Spending Happiness and Other Parting Thoughts The Toronto Star August 5 2012

16 WHEN LIFE BITES YOU IN THE WALLET wasteful or uninteresting to others if they fuel your life s engine go for it Shopping has There is no reason to feel deprived become a sport This assumes that you have clear for some people goals pay your bills on time and that And online you do not have a huge amount of shopping is an debt If you are in a difficult financial extreme sport situation denial does not resolve anyfor others thing then strict financial discipline is required It s time to stop purchasing those wants Be honest about your needs and make them your priority This rigid level of disciplined spending is for the short term only until your personal financial crisis is resolved Hopefully you will find that it is powerful to be in control of your money Then you can enjoy your wants assuming of course that they are reasonable Get over the financial industry jargon the silly clich s you tell yourself Begin controlling your financial reality

PART TWO The Lure of Debt So now that you are clear on the impact debt has in your life we ll explore some of the factors that lead to indebtedness There are lots of influences out there that can lead to debt accumulation the lure of impulse buying the proverbial need to keep up with the Joneses the ease of Internet shopping and the double speak of financial institutions In this part we ll help you separate the reality from the bunk we ll point out the pitfalls and situations to be attended to We don t want to sermonize but we want to help you to be aware of the many dangers and consequences out there surrounding issues of debt credit and other money matters you will incur in daily life

6 4 Debt Is Big Business DEBT IS BIG BUSINESS in North America We may not all be experts in finance and economics but we are experts at tapping into credit products Most certainly in recent years during unbelievably low interest rate periods North Americans have become very aware of the credit products available to them Unfortunately we have also tapped into increasingly complex products such as collateral charge mortgages1 or higher penalty products such as payday loans 2 We have an insatiable appetite to seek out these credit opportunities Our stratospheric consumer borrowing has helped A collateral charge mortgage differs from a conventional charge in 1 that a collateral charge mortgage can be registered for more than the value of the home at closing See www fcac acfc gc ca eng resources surveyStudies CIR CIR2011 2 eng asp emer2 A payday loan is a short term loan that can help you cover your 2 expenses until your next payday A payday loan is very expensive compared to other types of loans or credit products because of the high interest rate and fees that apply See www fcac acfc gc ca eng resources publications mortgageLoan PDFs TSPayDayL eng pdf

20 WHEN LIFE BITES YOU IN THE WALLET financial institutions achieve record high profitability 3 At the same time we are carrying record high household debt levels 4 According to a 2010 PricewaterhouseCoopers PwC banking survey conducted by Leger Marketing 81 of Canadians agree that the strength of the large banks is critical to the overall health of the Canadian economy 5 We have certainly put our money where our mouths are and been great banking6 customers According to the Canadian Bankers Association from 1996 to 2012 there has been an 86 6 increase7 in the number of mortgages for which Canadians are responsible And Canadians appear to be more responsible because mortgage arrears have gone from 0 59 in January 1996 to 0 32 in November 2012 The banks shareholders are winners because their stocks have increased in value and they are receiving dividends The banks employees are winners because they are receiving bonuses And the economy is a winner because we are continually receiving credit 3 John Greenwood Canadian Banks Ring Up Hefty Profits as Consumerlending Boom Continues Financial Post at business financialpost com 2012 12 06 canadian banks ring up hefty profits as consumerlending boom continues R K Chawla and S Uppal Household debt in Canada Perspectives 4 on Labour and Income Statistics Canada Catalogue no 75 001 X 5 PriceWaterhouseCoopers Perspectives on the Canadian Banking Industry 2010 at www investtoronto ca InvestAssets PDF Reports PWC report on canadian banks 2010 pdf 6 The terms bank and banking are used loosely to refer to the broader financial institution landscape Canadian Bankers Association Number of Residential Mortgages in 7 Arrears DB50 Public at www cba ca contents files statistics stat_ mortgage_db050_en pdf January 1996 2 357 036 and November 2012 4 398 539

Debt Is Big Business 21 through increased credit card limits lines of credit and car loans that we use to improve our homes to fund our lifestyles and to purchase consumer goods The bank is a business The bank is not your friend Somehow many of us have come to believe that if the bank is willing to offer us a large mortgage more credit cards and increased credit limits that it must be all right to use this credit Many of us believe that someone is watching behind the scenes safeguarding our financial health keeping us from Tough Love The over stepping our ability to manage bank is a business the credit we have been approved for The bank is not What you need to understand is your friend that bank employees are financially incented8 to offer you more products and larger loans The bank either requires you to insure your credit charges you a much higher rate offers secured credit 9 or knows that you are unlikely to default in your payments This is their business this is how they earn large profits What the bank doesn t know is how heavy credit burdens may cause you to experience stress in your personal or work life may increase health risks or may cause you to delay having a family starting a business switching to a new line of work or achieving some other satisfying goal You can become a slave to your credit and your Often banking employees are given bonuses or commissions based 8 on the number of products they sell or the dollar value of the products sold Secured credit means that an asset is secured against the loan and 9 the asset can be sold by the financial institution in order to retrieve money owed to them