Personal finance is often plagued with conditional “it depends” and “on one hand” advice that feeds confusion. So let’s try something simple and direct for 2023 and call it the year of paying down debt. With mortgage and home equity line of credit rates between 5 and 6 per cent, you can be confident that the best use of your money is to reduce the amount you owe.
Need something more to motivate you to cut debt? Let’s try this – a quick test to see how your mortgage, credit card, credit line and car loan debts compare to average levels. The urgency level for paying down debt depends as much on your financial means as the amount you owe. But comparing your own borrowing to average levels at least gives you a point of comparison to see how you’re doing.
Here are average balances owing for the third quarter from the credit reporting company TransUnion:
- Credit cards: $3,913
- Auto loans: $26,082
- Lines of credit: $34,968 (home equity and unsecured combined)
- Mortgages: $343,612 (recent and long-time homeowners combined)
The average debt numbers tell a story of moderation more than overspending. Credit card debt was up 9.4 per cent from a year earlier, but still down 6 per cent from the pre-pandemic days of 2019. Credit line debt was up 4.6 per cent in the past year, but remained 1.7 per cent below 2019. Auto loans were up 3.5 per cent from last year and up 7.4 per cent from 2019, but everyone knows that car prices have soared. The average mortgage balance per consumer was up 9.3 per cent on a year-over-year basis and up 25.6 per cent from 2019.
Including the rate hike announced earlier this week, the Bank of Canada has increased borrowing costs seven times since March. If you’re just managing to pay what you owe, forget about reducing the amount of your debt and focus on getting by until rates start declining.
But if you have the resources, paying down debt is a “results guaranteed” way to put your money to work in 2023. Pay off credit cards first because of the high rates (around 20 per cent) and then look at loans, lines of credit and mortgages. Reducing a mortgage balance before renewal helps offset the impact of higher rates.
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Rob’s personal finance reading list
Is the CAA worth the cost?
I say yes. I’ve had them replace a battery while I was stuck in a parking lot, change tires and tow cars a bunch of times. Also, the CAA card has got us discounts on hotels and parking at the airport in Ottawa, where we live. Now for an analysis by a personal finance blogger who outlines some alternatives.
Speaking of cars …
Here’s a look at how auto insurance costs might be affected by some of the big automotive trends of 2022, including the popularity of electric vehicles.
How to pay for your cellphone
Thoughts on whether to buy your phone outright, or finance it through the plan with your cell service provider.
The year in dividend investing
A blogger who focuses on dividend investing lists five stocks he bought this year. Not all have worked out.
Ask Rob
Q: I’ll be retiring in a year or two and wonder if you could do a story on annuities? With interest rates getting higher, is it getting time to buy soon?
A: Here’s my latest article on annuities, which was published during the summer. At that time, annuities payouts were up about 15 per cent on a year over year basis. Let me know if you’d like an update on annuity payouts.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Best cashback credit cards for business.
The Money-Free Zone
The all-female alt-rock band Prima Queen had a few singles out this year, and they’re all really good. My fave is Eclipse, which lyrically put me in mind of the Aimee Man song Coming Up Close.
Who I’m following on Twitter
Scott Barlow, the Globe and Mail’s in-house financial market strategist.
In case you missed these Globe personal finance stories
- Should Irene melt down her RRSP to try to save some of her OAS from being clawed back?
- How many people are covered by a workplace pension plan?
- Renting vs. buying a home
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP Survivor’s pension
