Economic News:  The ìDî Word

How many people have you run into lately who are trying the "cash" diet? Do you remember the last time you paid for groceries with actual money? Well, debt-reduction regimes are the rage this year, and one that tax and financial advisors can help their clients address this tax season as a part of the discussion of deductible and non-deductible debt. To help initiate the discussion, there are two new reports on household debt in Canada which may be of interest.

Last month, the Task Force on Household Debt released its report, Debt Crunch: Policy Recommendations for addressing Canada's Record Level of Household Debt.  Higher interest rates will likely exacerbate mortgage and debt defaults and reduced consumer spending, putting a damper on the economy. In the report, financial stakeholders are given responsibility for proactive measures to slow down the debt accumulation in this country.

Consumers are encouraged to do their part as well. The report articulates the most compelling reason for overspending: "A lack of general awareness around daily financial decisions and transactions is a risk to overall consumer financial well-being. In particular, consumers behave differently when using credit than when using savings to make purchases, making larger purchases with credit without the associated feeling of money "leaving their pockets." This speaks to the need to study and discuss behavioral finance as an issue, as well.

In his article Back to Old Fashioned Savings, CIBC economist Benjamin Tal notes that the Canadian savings rate is at an all-time low, lagging the U.S. savings rate by 1.6%. He points out that Canadians have been saving passively through increased value of their homes. But, the housing market is expected to soften and Canadians will be forced into active saving - putting real dollars into savings vehicles ñ to shore up their personal net worth statements. Mr. Tal predicts that, as in past recessions, reduced spending on non-essentials will result, in order for Canadians to find the extra money to put away each month.

With those observations in mind, it is important for advisors and clients to discuss a plan for tax reduction and active savings opportunities. And while chats about cash flow and household balance sheets may not generate immediate compensation for the advisors, a solid professional financial practice must provide this service with a long-term outlook in mind. Advisors who can help clients and their families achieve financial stability now, will deepen relationships as well as strengthen balance sheets. Taking the time to read more about this topic and finding the right tools and resources to recommend is a worthwhile endeavor.

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