Wednesday, February 18, 2009

good financial government

The role of government lately, is treading into the realm of personal finance advisor. On both sides of the 49th parallel governments are either commenting or implementing policy based on how they feel people should be managing their household finances.

Obama's fresh new $75B mortgage relief plan includes the following goal:
Convince lenders to cut monthly mortgage payments to sustainable levels, defined as no more than 31% of a homeowner's income. Write it down, the magic number, Barack is playing Suze Orman.

Let's assume this means 31% of gross income. If so, our lender needs no incentive as our mortgage payments represent about 12% of our income.

North of the border in Canada, Bank of Canada Governor Mark Carney came out and said that he is concerned about the level of household debt in Canada. Household debt in Canada currently sits at 130% of people's disposable income (a higher ratio than the United States). Average household debt in Canada rose to more than $90,000. Debt is apparently rising faster than income is in Canada.

Carney would not like the moneygardener's household finances. Our household debt represents about 175% of our income. I'm not concerned with our level of debt. Our Debt/Asset ratio is 0.54, meaning we have almost twice the assets as we do liabilities. Servicing a mortgage which comes in much less than Obama's 31% of income, means we are able to move the needle in the right direction by accumulating more assets while reducing debt slowly. Our income may pale in comparison to our debt now, but we're young and I'm confident that our debt is manageable given our assets and income.

What would Obama and Carney think of your personal financial situation?


Joe Aldeguer said...

Foreclosure is the major cause of our financial crisis. Government should really prioritize this issue.We should really keep ourselves updated.Thanks for sharing your thoughts.Good Day!

Traciatim said...

Could you find the study that said the average household debt in Canada was $90,000? I saw it in the paper and another blog but I still haven't been able to find the answer if that is simply all debts, or all debt - assets backing it.

I believe it may be including mortgages, but not the value of the house backing it. I have a very hard time believing that the average home out there has 90000 in consumer debt, which is what the newspaper article seemed to imply.

MG (moneygardener) said...

Traciatim, Here is one source:

I don't think it spells out mortgages explicitly but one has to assume that with the number being what it is mortgage must be included. I'm not quite sure what you mean by 'value of the house backing it'. I take this to mean all money owed to others (including mortgage, credit cards, car payments, LOCs, etc.)

Traciatim said...

Yeah, that's just a newspaper article. The exact same one was run in a bunch of newspapers stating the exact same wording.

What I mean, is say someone has no consumer debt at all, has a house worth 200K and a mortgage of 100K. You can hardly call them 'in debt' even though technically they have above average debt according to how you are calculating. If you simply just add up everything they owe then they owe people 100K, if they earn 75K a year then their debt to income ratio would be 1.33.

Their next door neighbours may rent a house and make the same income, but own three cars that they just purchased on credit for an average 33.3K a piece having 100K of debt. If it's all lumped together then for the purpose of this scare article it seems like they are in the exact same boat as the person next door, but if this family decided to close up shop, sell everything and walk they would still be underwater because they can't sell the cars for what the owe.

Since the article doesn't specify how they obtained the numbers it can be essentially ignored since it's just fluff trying to scare people in to worrying about how much consumer debt everyone has when it may not be consumer debt at all.

MG (moneygardener) said...

Traciatim, I agree with you fully and I don't think they are making a distinction. Therein lies the rub...

Traciatim said...

Oh, I found it... they do include mortgage debt, and do not include home value off of the mortgage debt, the 90000 figure simply adds up everything they owe and spits it out. It's a fluff piece.

The real numbers were actually the average is $25,563 of consumer debt and an average mortgage of $56,732. This would include all investment loans, car loans, house mortgages, but not include the value of the asset backed by the loan. So if you borrowed $25,000 to buy some high yielding stock these days that are valued at $25,000, even though you had no mortgage and your stocks could pay off the LOC in a heartbeat if you wanted you would show in their study as having almost the average amount of 'consumer debt'.

Buy a car for 30K with 5K down with no other debt obligations? You have 25K of 'consumer debt'.

Traciatim said...

Oh, one more tidbit I found in one of teh other Vanier Institute of Socialisms and Scare Mongering was a neat stat of "Total debt as % of total assets" which was 19% as of 2008. Not quite as scary anymore. Average net worth per household was listed as $393,111 for 2008.

I guess they left those stats out of their release to the papers so that they could make more headlines.

MG (moneygardener) said...

Thanks for the great stuff Traciatim. A lot of stories like this really just scratch the surface.

Any study of debt is meaningless without information about assets.

Sampson said...

I always wonder about these ratios - and exactly where my household stands. I feel we have a pretty good handle on our finances - but we have huge, huge debt.

Our #'s
Debt:Assets = 0.548
Debt:Income = 381%

So does this mean we are out of control?

Our savings rate is 20-25%. We are on pace to have our principle mortgage residence paid off when we reach 45yrs.

Again, I feel very in control of our household finances (minus any economic disaster related issues) - but show these numbers, and most would say they are out of whack?

CanadianSmallCap said...

We have no debt. Here is why: My wife and I both enjoy the freedom that being debt free gives us. In the last 17 years, we have dramatically changed our lives 3 times. Each time, it was by choice and it involved moving to a different part of the country. The fact that we did not have any debt to service made quitting our jobs much easier.

Debt is both a financial decision and a lifestyle decision.

MG (moneygardener) said...

Sampson, I see your point. I feel that debt/income is a a poor measure. Debt/Asset is a much better judge of one's financial health in my opinion. A solid savings rate north of 15% and a debt/asset of less than 0.8 or so is probably a sign of good financial wherewithall.

Anonymous said...

I really disagree with your portfolio makeup (cut and paste from your main blog page below).

We're talking major dogs here. I am short some of these same names.

* Toronto Dominion Bank (TD) 11%
* General Electric (GE) 7%
* IGM Financial (IGM) 7%
* Sun Life Financial (SLF) 7%
* Inter Pipeline Fund (IPL.UN) 6%
* Yellow Pages Inc. Fund (YLO.UN) 6%
* Bank of Nova Scotia (BNS) 5%
* Walgreen Co. (WAG) 5%
* Saputo (SAP) 5%
* Reitmans (RET.A) 4%
* Procter & Gamble (PG) 4%
* Sysco (SYY) 4%
* Johnson & Johnson (JNJ) 4%
* Husky Energy (HSE) 4%
* Royal Bank of Canada (RY) 3%
* Clorox Company (CLX) 3%
* Telus (T.A) 3%
* Fortis Inc. (FTS) 3%
* Canadian Pacific Rail (CP) 3%
* Diageo PLC (DEO) 2%
* Manulife Financial (MFC) 2%
* Scotts Miracle Gro (SMG) 2%
* Bank of America (BAC) 1%
* Cash 0%

Joseph Aldeguer said...

Foreclosure is the major cause of our financial crisis. Government should really prioritize this issue.We should really keep ourselves updated.Thanks for sharing your thoughts.Good Day!

Scott said...

Anonymous wrote: "I really disagree with your portfolio makeup (cut and paste from your main blog page below).

We're talking major dogs here. I am short some of these same names."

So what's your point, anonymous? Do you have something constructive to add or was this simply a pointless interjection?

Anonymous said...

debt reduces flexibility. debt is good until when it is not. what would happen if your family income goes down due to job loss or wage cuts? the servicing of debt would force to less optimal decisions. It is not about feeling in control it is about having the flexibility to deal with unforeseen or unfortunate circumstances. besides in times where deflation is a risk debt stays on your chest while your asset base shrinks.

Anonymous said...

@Scott - Point is, buy and hold doesn't work. Collecting dividends is not working lately either.