In this article Rob Carrick reports that Canadian household debt levels are rising faster than income levels, and he explains the potential negative effects that excessive debt could have from a personal finance viewpoint.

Appropriate subject areas:

Personal finance, economics, behavioural finance

Key Questions to explore:

• Why have Canadians decided to increase their borrowing?
• What are the potential benefits of borrowing? What are the potential risks of borrowing?
• How does excessive borrowing affect the spending flexibility of a given household?
• What is recency bias? How does it affect an individual’s behaviour?

New Terminology:

Recency bias, disposable income.

• Recency bias is a tendency to think that recent events will continue to occur for the foreseeable future. The author believes that recency bias is reflected in Canadian spending habits, as people believe that interest rates will remain low for the foreseeable future.

Materials Needed:

A copy of the article

Introduction to lesson and task:

Canadian households are increasingly depending on debt to fund their style of living. According to Statistics Canada, in the second quarter of 2016 household incomes rose by 0.5% while household debt rose by 2%. The ratio of household debt to disposable income hit a record 167.6% in the second quarter, up from 149.3% in the second quarter. This shows that Canadians are dangerously comfortable with increasing their borrowing faster than their income is rising, which could make repayment much more difficult if there is an increase in interest rates.

This dependence on debt is bad for the following reasons: It decreases families’ spending flexibility; it leaves them more vulnerable to financial shocks ahead; it suggests that people are not saving as much as they should be, nor are they planning solidly for retirement.

There are numerous reasons this could have a dire ending. Chief among them is the fact that an increase in interest rates will mean that Canadians will be unable to finance their daily lifestyles or meet their debt obligations.

It is important for teachers to use this opportunity to warn students about the dangers of an unhealthy over-reliance on debt and the threats this could pose.

Action (lesson plan and task):

• Begin by explaining to students that Canadian households are currently heavily reliant on debt to meet their everyday needs and wants.
• Ask students if they can explain why Canadian households are increasing their debt.
• Ask students to explain why this represents bad personal finance habits.
• Ask students to explain how a reliance on debt can leave households more vulnerable to shocks in the economy or unexpected negative events in their households.
• Ask students to suggests some ways in which families can improve their saving and spending habits.

Consolidation of Learning:

• Ask students to research some events that might make it difficult for families to meet their debt obligations and state what potential effects this might have on their household dynamics.

Success Criteria:

• After completing this lesson, the students should be able to do the following:
• Understand the importance of managing debt to acceptable levels.
• Understand how to reduce spending and set aside a portion of their income for saving and investing.
• Understand the consequences of not saving adequately for retirement or relying heavily on debt to meet day-to-day expenses.

Confirming Activity:

• When students have completed this lesson plan, they should be asked to make an argument for how the Canadian borrowing binge can be reversed, and how disaster can be averted.