Debt And Mid Life Crisis

Whether you know it or not, you may be going through a mid-life crisis.  It usually crops up around the age of 35 to 40 because of many things, but family changes and debt accumulation can be the most problematic. It may be that you have acquired debt for several reasons in the years leading up to mid-life.  Job changes, health issues, unforeseen circumstances, trying to fund you children’s education after they have completed high school or financing their vehicle purchases are just a few of the things that may lead to overbearing debt issues. Debt problems at this time of life can create emotional and marital stresses that may be difficult to overcome. 

For most people, it will be a time when the children have left the family home and income that was required to maintain a full family budget is freed up to support two people.  Instead of saving the extra cash, many couples fall into the ‘wants versus needs’ category because they have generally sacrificed most of their disposable income to provide for the family.  With extra income available, it’s easy to become trapped using all of the borrowing options available to fund purchases they really can’t afford like the new car, truck, boat, motor home and the dream vacation.  You get the picture.  Lines of credit can be easy to get and credit card providers are eager to increase limits so there’s lots of money available to get the ‘wants’ that have been overlooked because of family responsibilities.

So before you make a mid-life decision such as selling your home, quitting your job, buying a car or that dream vacation, it may be the perfect time to go on a ‘spending diet’ and rethink your priorities and your goals to reduce debt. Set a realistic budget and establish or add to an existing savings plan for your retirement and a ‘slush fund’ for unexpected financial requirements in the future.  Here are a few things you should think about before making a drastic change to your lifestyle.

It’s important to really sit down and think about how much disposable income is available when the number in your household has been reduced by teenagers moving out to go to college, trade schools or off to find their own way in the world.  This can be a good time to set new goals and priorities with a view to paying down debt and saving for your retirement.  It’s a fact that you are much closer to retirement and you do not want to be carrying debt into your retirement years.   You must assess the type of debt you already have and instead of going on a spending spree, you should try to pay down existing debt – particularly unsecured debt like personal lines of credit, credit cards, overdrafts, etc.  Begin this process by paying out the highest interest loans and cards then working your way to paying all unsecured consumer debt.   If you haven’t done so already, you should establish a savings plan so that you will be able to meet your retirement income goals.

As well, look at your secured debt like home mortgages and vehicle loans to determine whether you have built up any equity in these assets over the years.  Check your property tax assessment as a start to see what your house is worth according to the town or city you live in.  Have a real estate agent provide you with an estimate of sales value and obtain a current mortgage statement from your bank.  You can get an idea of the equity available in your home by averaging the home value and subtracting the mortgage balance.  Clearly, if you have already obtained a second mortgage on your home or have not paid property taxes, you may have little equity available and may be on the edge of financial trouble even before you consider how to budget based on reduced family responsibilities.  Should you find yourself in this situation, it may be wise to make an appointment with an MNP Debt Professional to review your financial situation to help you understand how financially healthy you are.  The advice is free and it doesn’t hurt to ask.  The fact is that you may be in a position where you need a life changing debt solution.

Even if you find that you have sufficient equity in your home or other assets, you should be wary against pledging second mortgage security against your home to a lender for additional borrowing.  In Alberta, there is an exemption claim available of $40,000.00 for a principal residence protecting you from creditor enforcement and it may be unwise to pledge any of this as security. Should you consider selling your house, you will need to make a plan as to where you are going to live. Is there enough equity in your home to provide for a good down payment on a new purchase or will you be satisfied to rent an apartment or a house and save the equity derived from the sale?  Investing the proceeds into a Tax Free Savings Account or adding to a Registered Retirement Savings Plan can provide you with a solid source of income when you eventually retire.  For most of us, investing in our own principal residence will be the largest and most profitable investment of our lives, so selling and moving elsewhere at this time can be the most important decision you’ll ever make.

At the same time you are trying to decide whether it is wise to sell your house, you may be seeking or require a change of employment which may require relocation as well.  If you have equity in your home and you’re moving from a large centre like Edmonton or Calgary to a smaller town or city, the move could be financially profitable.  You may be able to use your equity to purchase a new home outright or to provide a generous down payment and reduced mortgage balance to repay.  However, should your job change take you in the opposite direction, from a small town to a large city, you may not have enough equity to provide for a good down payment and you’ll certainly have to look at downsizing in order to reduce the amount you will have to mortgage with your new home.  Will your new job provide sufficient compensation to ensure that you will be able to live in a larger center? 

Contemplation of a job change during mid-life requires the same type of assessment of your current financial situation as does deciding to sell your house.  Are you willing to give up your current job and corresponding salary and benefits to move to a lower paying but less stressful job?  What about pension plans and savings for retirement.  Will your new job provide you with benefits to ensure that the kind of retirement income you will eventually need will be available?  Are you giving up medical and dental coverage that you may need as you get older by changing jobs?  Maybe the old job isn’t so bad after all?

Obviously, these questions are difficult to answer and require a lot of thinking and planning.  If you are on a solid financial frame when you reach mid-life, it makes it easier to decide what to do and where you want to end up after these changes are made.  If your mortgage is paid off, your vehicles are free and clear and you have no unsecured debt balances like lines of credit or credit card debt, then you have much more flexibility to do the things you want to do and make plans for the future. 

The bottom line is that seeking the advice of a Debt Professional at MNP LTD. to determine your financial health is a good idea before you make drastic changes to your lifestyle. You’ll then be much more prepared for managing your own mid-life crisis if or when it arrives.