The beginning of every year is a tricky time for all consumers. We are just starting to pay the bills from the holiday season while at the same time encouraged by the banks to make RRSP investments. The RRSP season, in my opinion, couldn’t come at a worse time. The consumer takes a double hit within the first four months of the year with post holiday debt repayment and RRSP investment plans.
Of course the banks know how much debt consumers have. They encourage increased credit before the holiday season so consumers have more room to buy more….more than they can afford to pay back. They enable consumer debt and profit from it through high interest rates and never ending minimum payment plans. While the banks are making money off the consumers back with the debts they owe, they now focus on offering low interest loans for RRSP investments. They conduct surveys that show Canadians are more focused on saving that happen to coincide with their advertisements for RRSP investing.
RBC recently conducted a survey that showed Canadians are focusing more on savings than paying off their debt. It showed 52 per cent of respondents are saving for retirement more than they did last year at 44 per cent. Only 48 per cent are focusing on debt reduction compared to 54 per cent from last year.
Banks are double dipping.
Getting consumers to invest in their investment products gets the bank’s hands deeper into the consumer’s pockets. Banks are already earning a high profit from credit card loans and car loans. By further consolidating loan payments they can encourage a person to take on another loan payment as long as they can keep paying the minimum payments. In other words, bank can make it “comfortable” for consumers to manage debt by keeping the payments low.
Are consumers comfortable with managing increased debt?
Now that the debt to income ratio has reached a record high of $1.64 per cent (owing $1.64 for every $1 earned each year), Canada’s biggest banks now say that consumers are reaching the limit on much they can afford to borrow. Nevertheless, like any business, banks continue to encourage consumers to keep spending to fuel the economy, to keep borrowing at low interest rates and to save for retirement by investing in their products. By making it easier for consumers to take on more debt banks keep the wheel of debt on spiraling.
You need to take control of your own spending, define your budget and make a reasonable plan for retirement. Banks can offer helpful advice, but if it means borrowing more than you can afford to repay to invest in a savings plan, you may not be richer than you think.
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