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Bunker down -- an economic storm is coming and it's called debt 21 · Thursday, September 13, 2012 OAKVILLE BEAVER · www.insideHALTON.com L ast week the Bank of Canada performed an economic triage where our country's priorities were placed above the priorities of Canadians. There is an economic storm coming and it is called personal debt. The largest financial risk to Oakville families is the historic high level of personal debt. Financial harm is coming our way and that is not so much a prediction but a certainty. All that is up for discussion is when and how hard this financial storm will hit you, your family, friends and neighbours. Recent predictions said there was a 20 per cent chance that Canada would slip back into a recession. The potential causes are the continuing European debt problems and sky-high personal debt levels of Canadians. The European debt problem is out of our control. Canadian personal debt is not. Mark Carney, the governor of the Bank of Canada, has announced four times since the spring that there will be an increase in interest rates in order to discourage Canadians from increasing their personal debt, such as mortgages, credit card balances and personal lines of credit. Last week, Carney had the opportunity to increase interest rates. However, no change was made to the benchmark interest rate. This is the longest period of unchanged interest rates in over 50 years. An increase in the cost of borrowing would, as he has been saying for most of this year, help Canadians better manage their debt levels. Consumers would slow their borrowing and accelerate debt repayment. Higher interest rates will help us because that is the only way to break this Dollars & Sense By Peter Watson overspending economic spiral that is eroding the financial stability of Canadian households. So what did Mr. Carney do last week? Nothing. Did no action help Canadians? No. The country's economic priorities were put ahead of the economic priorities of the individual citizen. Weaning Canadians off of debt addiction could challenge our country's fragile economy when overspending keeps the economy moving forward. In this small global village called planet Earth, we are all very interdependent. Europe has financial problems and China's economy is slowing; therefore, Canada is feeling the consequences. Consumer overspending is kept on life support by low, alluring interest rates. Our recommendation is to forget the economic state of the world and turn your attention to your financial priorities and what is best for you and your family. Pay down your debt and start now. Begin with a little household budgeting. Call your financial advisor and request an appointment. Ask that your cash flow projections for retirement, or at least for several decades if you are younger, be re-done. Assume the servicing cost of your total debt increases by two per cent. What does that do to your cash flow? What does that do to your financial objectives, such as educating your children or managing your retirement? Re-do the numbers and this time assume interest rates increase by three or four per cent. Current interests rates are far below historic averages so do not be lulled into a false sense of security by your current borrowing costs. Keep the financial planning conversation going and assume the value of your house declines by 10 or 20 per cent. Housing affordability is based on interest rates and when the cost of homeownership goes up, there will be downward pressure on housing prices. How does a possible decline in the value of your house affect you? As for your financial future... batten down the hatches. The debt storm is coming. -- Submitted by Peter Watson, MBA, CFP, R.F.P., CIM, FCSI.