91 – When Debt Is Not A Four Letter Word

Wayne Kay 00:04
Well, welcome to the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. 

I’m Wayne Kay, and today we’re going to be talking about when debt is not a four letter word. We are going to learn about what is good debt, what is bad debt, and how to know the difference. And what if you blow it and you need help? What do you do then?

My guest today, Bonnie Hooley with LCTaylor Licensed Insolvency Trustee from Winnipeg. Bonnie, welcome back.

Bonnie Hooley 00:35
Thank you, Wayne. It’s nice to be chatting with you again.

Wayne Kay 00:37
Yes, we always have some great conversations. So I’m looking forward to our show today, all about that four letter word, debt.

Bonnie Hooley 00:46
Yes, I picked that topic because whenever I tell people what I do for a living and I say I help people with debt, it’s like I said, I help dead people. And I always think of that show or that movie, the Sixth Sense, where the guy goes, I see dead people, and I think, yeah, that’s me. I see debt people. But I want to help people with debt, and I want to help people avoid falling into the pitfalls that debt can have.

And I want people to have a healthy respect for debt, but also see that they could use debt to their advantage. So I thought it’s time to put a more positive spin on dealing with debt so that it’s not the scary four letter word.

Wayne Kay 01:23
So where would you like to start today when it comes to this four letter word?

Bonnie Hooley 01:28
I think I’d like to start with some basics. So people assume that there’s good debt and bad debt.

And so as long as I stick with good debt, then I’ll be okay. But it’s not as simple as good debt and bad debt, because one of the things I want to talk about is that good debt can turn terribly wrong for you. And I sometimes see that with clients that I deal with and also bad debt, or what’s considered bad debt, you can make work to your advantage if you’re really wise and are careful with things. 

So basically, people traditionally think that debt is good, or maybe good if it has the potential to increase your wealth. A standard example of that is a mortgage.

And traditionally, people think that debt is bad if it’s used for items that are consumed because it rapidly deteriorates in value. And the traditional example of that is a credit card. And so I want to show that not always are mortgages or homes a good debt and not always our credit cards a bad debt.

Wayne Kay 02:42
Okay, well, these days, I don’t know if you remember back in the day, a lot of people would say we don’t want any debt at all. We’ll save up to buy a car.

A house was pretty much the only thing. But back then you could buy houses for $100,000 or $200,000. Those days are gone now.

Bonnie Hooley 02:59
Cars, yes. My parents were of that generation where they avoided debt at all costs, except they did eventually cave in and bought a home.

And they were very fortunate because their home increased in value. And so it turned out to be a good debt for them. Often, some people who buy homes, they’ll say, well, what do I qualify for? And then they’ll go for the max and they’ll buy the biggest home that the bank says they can qualify for. So often, as soon as there is any little thing that hits the road, they start to get behind, because there’s a lot of hidden costs when you buy a home.

There’s things like maintenance, yard maintenance, having to buy the lawnmowers and the snowblowers. There’s sometimes interest rate fluctuations. And so when it comes time to renew the mortgage, if you’ve gotten the maximum, you may not be able to afford to renew. And if interest rates have gone up, now you’re looking to sell your home at a time when prices are dropping because interest rates have changed. And also, if you always mortgage to the max and you run into trouble, you can’t make your mortgage payments – now you have a massive debt that you’re falling behind on and gets really hard to get caught up on.

Wayne Kay 04:11
It’s unbelievable how much a house can actually end up costing.

Bonnie Hooley 04:15
Yes, sometimes for many people, renting is a better investment of their money because there’s taxes, and if you’re in a condo, there’s condo fees and then there’s repairs and maintenance. And people don’t often put aside money for that or plan to put aside money for that. So a home is a lot more expensive than it appears on paper, but it can pay off.

Because if you purchased a home and you didn’t max it out and you had money for a lot of the extras, that home can often cause the increase on the home. If homes go up by 1% in value, or 2%, which is pretty modest, you’ve got the value of your home increasing by that amount, rather than just the value of your investment increasing by that amount. 

So in those situations, home purchase can work wonderfully for you. Sometimes it’s a bit based on the market hanging in there, making sure that you haven’t overextended yourself.

Wayne Kay 05:16
What are prices like in Manitoba?

Bonnie Hooley 05:19
Home prices in Manitoba are pretty good. I would think that we are probably among the lowest in the country. And traditionally in Manitoba, home prices don’t drop. I think the last time, ironically, the last time home prices dropped in Manitoba was when the previous Trudeau was Prime Minister. And then the second time they dropped was when this Trudeau was Prime Minister.

And ironically, I don’t think it had anything to do with the fact that it was Trudeau. It’s just like a good marker. But in Manitoba, it’s a good investment to buy a home generally because we don’t drop in value, but we don’t increase substantially or quickly either. So it’s a very solid, slow growing investment.

Wayne Kay 06:02
Okay, so that’s a good thing because if you come to BC and you look at the housing prices when we’re talking about bad debt, good debt, and maxing out, it can be easily 700,00 – 800,000 and up is where you’re starting. So it’s a completely different ballgame. 

When we talk about debt, you say a house isn’t always good, but it isn’t always bad. It kind of depends on your situation and I guess it would be how much you’re able to put down. Are these things that people need to be aware of before they go to purchase?

Bonnie Hooley 06:38
Yes. Some things you have control over, like not always getting the biggest mortgage you can afford. Also not amortizing to the max. Limit your amortization because otherwise all you’re doing is paying interest. 

And also making sure that your budget has room for unexpected expenses because the one thing you can count on when you’re a homeowner is unexpected expenses and insurance does not cover everything. So if you do those things, then generally buying a home could be a good investment. Now obviously there are things that can happen where both of you lose your jobs, you own a nice business and a pandemic hits.

There’s things that, no matter how well you plan, could set you back and you could lose your investment. But generally speaking, if you are cautious in your investment on a mortgage and you put money aside for emergencies and don’t try to live beyond your means, then it’ll be a pretty good investment for you. And it will be considered good debt, because what you’re paying in principal every month instead of paying it into rent, is growing for you. So that when you choose to sell your home or retire, that money is sitting there waiting for you.

Wayne Kay 07:55
And so when is getting into debt kind of a bad thing?

Bonnie Hooley 07:59
Now, credit card debt is traditionally viewed as bad, so I want to talk about that a bit. Interest rates are ridiculously high, even though they may not seem that way, but because of the way they compound the interest, you end up paying for things ten times over if you make a minimum payment on a credit card. First of all, you’ve spent more than you earned that month, so you’re living beyond your means. But secondly, if you read the small print, you’ll be paying for this pretty much till after you’re dead. So you never want to make the minimum payment. If you’re going to use a credit card, always pay off the amount that you charged, unless you need the credit card to be used for short term financing for a month or so.

But if you use it for short term financing for a month or so, that’s not good debt. There’s better ways to borrow money than to use a credit card. So the only good way to use a credit card is to pay off the entire balance at the end of each month. Now, Canadians traditionally don’t do that. Equifax reported in March that credit card debt in Canada is more than $100 billion. That’s billion with a B. 

So if you consider how small Canada really is, that means that the majority of Canadians are carrying bad debt on their credit cards, and so they’re charging or spending more than they’re earning. 

Now, I want to also tell you how you could make a credit card work for you if you’re a good budgeter, which from my conversations with you, Wayne, I’m pretty sure you are. This is one way that you could make money using a credit card. 

If you traditionally spent about, I’ll just use the number $5,000 a month on your monthly living expenses, and you got a credit card that didn’t charge you an annual fee. Then what you could do is basically charge everything on your credit card. So your $5,000 is now charged, and at the end of the month, pay off the entire credit card and then do it again the next month.

What you’ve done is you’ve kept your original $5,000 that you would have kept to spend during the month, and you’ve deferred using that money to pay off your credit card indefinitely. So if you were extremely wise, you would take that $5,000, invest it in an interest bearing account. Then always pay off your credit card on time, and you could be using the credit card to make interest on the money that you invested. So it’s a little convoluted. You’d have to be very disciplined to do that. But the main point is that even though traditionally credit cards are viewed as bad debt, it doesn’t have to be bad debt if you use it appropriately.

Wayne Kay 10:46
What about all the points? That’s kind of what I was thinking of. They tried to get us with points, and for the longest time, I just kept saying, no, thank you. But eventually I did cave and get one. I think I got a cash back one and one at a grocery store, but otherwise, I’m still of the mindset that I don’t really like using my card.

Bonnie Hooley 11:06
With the cash back, personally, I use a cash back card. It has an annual fee, but the amount that I charge is going to be like – the annual fee that I pay for my credit card is far less than I get in cash back. 

So in my situation, not only am I deferring, I’m going to use $5,000 in expenses indefinitely, I’m also earning cash back. That’s more than my annual fee is because I actually leave it on the card to make sure it’s there to cover the annual fee. And then I know what’s bonus over and above that.

So if you use the card all the time and pay off the entire balance every month, you actually can make money using a cashback card.

Wayne Kay 11:48
Okay, I’ll work on it.

Bonnie Hooley 11:52
I know it’s that connotation that debt is a bad word right now.

Wayne Kay 11:56
What about getting into debt for good things? What would that look like?

Bonnie Hooley 12:02
Okay, so the main good one, obviously, is the house. But there’s other things like RSPs, GICs, anything that’s going to grow in the market traditionally are considered good debt. But the other thing to be cautious of is that no matter how much you plan, or how well you do, life can happen and things can go south. So you may have to cash out your RSPs because you’re unemployed for more than three months and the EI isn’t covering your expenses.

Or you may have to sell the house and downsize because life happens. So although those are good investments, don’t be afraid to try them. Don’t ever try them with a high level of risk, because otherwise you’ll be a client of Bonnie’s, which I meet with people that have financial trouble. 

And if you are cautious or you weren’t cautious in the past and you want to be cautious, but if anytime you find yourself – I’m in over my head, I got to get my debt under control, get it back on track so that I can do these things better and properly or start again because life happened. There’s always professionals like myself that can meet with you, help you get rid of the debt, get you back on your feet, so that you can start planning for good debt investment.

Wayne Kay 13:28
Okay, when we talk about this life happening and stuff, so sometimes you will have bad debt. Is there a way to take that bad debt and make it into good debt or not?

Bonnie Hooley 13:39
Well, sometimes you have to sacrifice your credit rating to do that. So if you had, let’s say, a credit card that was bad debt, we do meet people sometimes that have built up a lot of equity in their house, but meanwhile, they’ve been spending on their credit cards beyond their means, so they’re paying a ridiculous amount of interest on their credit cards. So sometimes getting a secured line of credit against the house or coming up with a plan to get rid of the credit card debt and making it a priority, paying off the highest interest debts first is getting a secured line of credit.

To get rid of credit card debt can be a good debt investment to get rid of bad debt, as long as you manage it properly. Because those are the three things – there’s good debt, bad debt, and how you manage it. Because if you take your credit card debt, put it on a secured line of credit, and then spend the next 25 years paying it off, you’ve just paid more interest than you would have paid on your cards. So you’d have to make a plan to get it paid off wisely in a short period of time, always aim for five years or less.

Wayne Kay 14:46
Okay. Gives me heart palpitations because I’ve been there. I’ve been at a point where it was like, oh my gosh, I’ve got too much debt. What am I going to do now? How am I going to get out of this? And then we had to do extra jobs to make it happen.

So I think there is a good side to it all is when you get to that point, when you come out of it, you say, okay, I’m not going back there again, and I hope I’m going to manage, how do you say, life happens? I’m going to try to manage it as best as I can, looking into the future with my little crystal ball. Yes, life definitely does happen, and I think it’s also very expensive when you’re young and you’re starting out families and car breaks, so many things can happen, right?

Bonnie Hooley 15:33
Yes. Before you’ve had a chance to build up the nest eggs and the protections and the safety nets.

And so don’t feel bad if life happens and you find yourself in a place where your debt is out of control, because there are professionals that can help you with a proposal to your creditors or if necessary, Bankruptcy, just to wipe the slate clean. Get back on your feet.

It’s just like other government programs. It’s created to help honest and unfortunate debtors get back on their feet, because life happens. And that doesn’t mean that you’re not going to be productive in the future or that you’re a failure. It just means that we got to give you a little bit of a reset so you can start making a better future for yourself.

Wayne Kay 16:17
All right, that’s great. Any final words of advice you want to share with us when it comes to debts and not being that four letter word?

Bonnie Hooley 16:24
Yes. So four things I want you to remember when you’re not going to look at debt as a nasty four letter word.

So plan carefully, make your debt work for you and have a healthy respect for what can go wrong. And if something does go wrong, seek help sooner than later, because the sooner you seek help, the more options there are to help you.

Wayne Kay 16:46
Because we know that every person that goes and sees Bonnie says, oh, I wish I’d been here earlier. Right.

Bonnie Hooley 16:54
They really do.

Wayne Kay 16:56
How could they not? Because you’re helping with the solution to this major problem that they think they’re the only ones going through. So that is just wonderful wisdom. Bonnie, it is always a pleasure. Thank you so much for being on the show.

Bonnie Hooley 17:08
Thank you, Wayne. It’s been great chatting with you.

Wayne Kay 17:11
Well, my guest today, Bonnie Hooley from LCTaylor Licensed Insolvency Trustee. And if you have questions, you have debt, you want some help, some guidance, you can always schedule a free consultation with LCTaylor Licensed Insolvency Trustee by going to the website LCTaylor.com.

And that’s it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening.