Canadians have become more indebted than ever, suggesting that debt management has become critical, say TD economists in a report.
"The growth in personal liabilities has been a powerful trend that has greatly impacted the balance sheets of households," says Craig Alexander, VP and deputy chief economist of TD Bank Financial Group.
"This has a major implication for financial planning, which has traditionally focused on the accumulation of assets, particularly through portfolio decisions.
"However, the management of liabilities has now become just as important," he suggests.
Individuals should differentiate between "good" debt and "bad" debt, says the TD. Good debt is the assumption of liabilities for financial gain or a better quality of life. For example, education loans and mortgages represent investments that can provide significant returns, such as higher income in the case of the former or a usually appreciating asset in the case of the latter.
In contrast, sustained high credit-card balances driven by impulse purchases represent consumption and generally undesirable debt.
There is an old adage that if you don't know where you want to go, you won't get there, notes the TD.
"All Canadians should have a financial plan, and debt management should be part of it," says Alexander. "We live in a credit-driven society today. This means that financial literacy should include an understanding of debt management, while financial planning should include discussions about liabilities as much as assets."
