Canadian Consumer Debt

At over $500 billion in 2014, Canadians’ consumer debt levels are cause for alarm. Consumer debt encapsulates the outstanding debt of consumers that funds consumable goods which do not appreciate in value, including vehicle loans, item purchases, etc. Canadians’ debt related to mortgages represents $1 trillion, though this can be viewed as an appreciable investment.

Consumer debt, then, is only taken on when a consumer purchases an item which they cannot pay for immediately, and are willing to pay an increased amount for later as a result of interest on said purchase. Why does the average Canadian consciously decide to carry optional debt to the tune of over $20,000 on average (excluding mortgage debt)? Psychology.

The Reason for Consumer Debt

In various ways, the human brain is responsible for an individual’s spending habits. Marketers spend countless advertising dollars in an attempt to influence our brains, even without our conscious realization. Consumers are bombarded with messages urging us to spend our hard-earned money on whatever an advertiser happens to be selling. There are also the efforts of retailers and shopping malls to keep shoppers’ minds at ease during their shopping trips through a mixture of confusing architectural design which serves to lead us to the next distraction, pleasant aromas in the air, and appealing music designed to get us in the mood for spending.

There are also societal pressures teaching us from an early age what “success” and “happiness” look like, with seemingly happy and wealthy individuals being featured heavily in various forms of media. By the time a Canadian reaches the age of 18, they will have been taught by family, friends, marketers, the media, and society that material wealth is directly correlated with happiness.

With this in mind, the levels of consumer debt in Canada are not so shocking. If your family, friends, and seemingly everyone else around you is reinforcing the concept that material possessions are directly linked with happiness, why wouldn’t you do whatever it takes to achieve happiness, even if it doesn’t make financial sense? Logic and self-control can’t make you happy, but possessions apparently can.

Unfortunately for the 50% of Canadians over 18 who have taken on credit card debt, society has been less than truthful when it comes to the true source of happiness.

The Psychology of Happiness

Brickman and Campbell, in their 1971 essay “Hedonic Relativism and Planning the Good Society,” coined the term Hedonic Adaptation, which is the concept that humans tend to quickly return to a stable level of happiness despite major positive or negative events, or changes in circumstance. This concept has been demonstrated in various psychological studies in the field of Positive Psychology, which is focused on discovering lasting ways to increase happiness.

In terms of the question of taking on consumer debt to increase levels of happiness, this empirically demonstrable psychological theory argues that, if purchasing material goods makes us happy, it would only do so for a short amount of time before we recede back to our average level of happiness, while also resulting in our adaptation to a new level of material comfort. Within a short amount of time, increased levels of happiness return to the average level of happiness which people generally experience across cultures and socio-economic classes. In the same way, if a family in a developing country’s one-room home was leveled by a tropical storm, forcing them to live in a tent for several months, their initial sadness over their situation would subside with time as they adapted to their new circumstances. We are highly adaptive creatures, changes in comfort and circumstance become the new “normal” before long.

What psychology tells us then, is that material goods and the comforts afforded by wealth do not have a lasting impact on our overall levels of happiness. As such, if we reduce our standard of living, or simply our spending on consumable, depreciating items (new cars, the latest electronics, etc.), we should not expect a long-term decrease in our levels of happiness. We may experience short-term decreases in happiness as we trade in our Hummers for Smart Cars, but according to experts in neuropsychology, before long we won’t be any worse for wear.

The Truth about Consumer Debt

With this information in hand, we can think of consumer debt behaviour as it truly is; an expensive, short-term fix to give ourselves satisfaction for an innate human craving- happiness- with side effects including high stress, financial ruin, and addiction to something fundamentally destructive. A drug. To retain the “high” of consumer spending’s effects on our happiness, we must continuously make purchases, or risk “crashing” to our average level of happiness.

Society has its reasons to tell us that material goods will buy us happiness, and most of them revolve around corporations competing for our hard-earned money. Fortunately, the human squash is a wonderful thing, and, armed with this analysis of how our squashes work, the average Canadian can experience financial freedom, with a short period of withdrawal until our happiness level normalizes being the only catch.

The Solution

Personal finance is a passion of mine, with my personal goal being financial freedom by the age of 50 (i.e. freedom to never be obligated to work for anyone’s gain but my own; to be free to follow my passions and dreams). This seems unreasonable to most people; I do not have a six-figure income, and it seems as if the average Canadian is struggling to retire by the age of 65, let alone 15 years early. Perhaps it is time to break away from the crowd, seeing as the average Canadian makes a conscious decision to carry $20,000 of unnecessary debt, which obviously has a huge impact on the average retirement age of 62 in this country. In actuality, this goal is not unreasonable for Canadians making the average Canadian hourly wage of $24.50, and is surely possible for individuals making much less, depending on how they choose to live both now and upon retirement.

I will readily admit that material goods, and the mental “high” provided by unnecessary, yet fun, purchases are a constant temptation in my life. But I also know that, like a drug, wasting my money on typical consumer debt items is fundamentally bad for me, as well as my family and friends, and will not make me any happier in the long-run.

To avoid this temptation, I have a significant percentage of my after-tax income automatically withdrawn from my bank account monthly, and placed into long-term investments, artificially making myself as “poor” as I was when I was a landscaper working 55 hours per-week for $12 per-hour, and forcing myself to make wise spending decisions to remain within my self-imposed financial limitations. Science shows that this decision does not predispose me to be less happy in the long-run than any other Canadian, while also meaning that I will avoid many of the stressors caused by high consumer debt levels. The only stressful thing about saving money is the constant temptation to fall into instantly gratifying spending habits which are “pushed,” like a drug, by the media and those who have been influenced by it.

Since personal financial behaviour seems to revolve around adaptation, we must ask ourselves what we would rather become comfortable with: high-interest debt to fuel purchases which cannot help us to achieve long-term happiness, or stress-free financial freedom.

Canadian Government Funding Curbs Business Debt

Canadian businesses can learn from the trend in consumer debt. Business expenses are mandatory, however the Canadian federal and provincial governments have created small business funding grants and repayable funding to lessen the financial burden and lower the impact of interest rates of conventional financing options. Learn more by attending a free funding workshop or webinar to see how you can lessen your financial burden for smart strategic initiatives, including hiring, training, research, business expansion, and technology adoption.