A new year won’t solve all of your financial problems: Tips for a better 2025

Household debt to disposable income shows a slight improvement

According to Statistics Canada the household credit market debt to disposable income ratio improved slightly in 2024. As of the third quarter, Canadians owed $1.73 for every dollar of disposable income, down from $1.83 in 2022. This decline indicates progress, but debt levels remain high, reflecting the financial strain on many households.

To illustrate the change, consider a household with $50,000 in disposable income. In 2022, that family would have carried $91,500 in debt. Today, their debt would be closer to $86,500 — a step in the right direction but still a significant burden.

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Bank of Canada rate ease: Interest rate cuts offer some relief to borrowers

For those with mortgages or variable-rate debt, 2024 brought some relief. The Bank of Canada lowered its overnight rate to 3.25% on December 11, 2024, down from 4.25% a year earlier. This change translates to reduced borrowing costs for many Canadians.

For example, a homeowner with a $300,000 variable-rate mortgage saw their monthly payments decrease by approximately $200, thanks to this rate cut. While this is welcome news, interest rates remain elevated compared to the pre-pandemic years, requiring continued prudence.

Household debt service ratio shows gradual progress

Another sign of financial improvement is the household debt service ratio, which fell to 14.72% in the third quarter of 2024, compared to 14.97% in 2022. This metric measures the proportion of disposable income required to cover debt payments.

Although the decline is modest, it reflects incremental progress in Canadians’ ability to manage their debts. For instance, a household with $50,000 in disposable income would now allocate $7,360 annually to debt payments, down from $7,485 two years ago.

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Housing affordability remains an ongoing challenge

Despite falling interest rates, housing affordability remains elusive for many. Rising borrowing costs over the past few years have outpaced declines in home prices. For prospective buyers, this means that owning a home is still a significant financial commitment.

If you’re planning to buy, avoid trying to “time the market.” Instead, focus on finding a home that fits your budget and long-term goals. Remember, a home should be a place to live, not merely an investment vehicle.

Practical tips for managing grocery costs amid inflation

Grocery prices have been a persistent pain point, with inflation pushing up the cost of essentials. While the price of a head of lettuce reaching $9 may have been an extreme case, food costs remain high. To combat rising expenses, consider strategies such as meal planning, buying in bulk, and reducing meat consumption.

For example, switching from canned beans to dried ones can cut costs while offering the same nutritional benefits. Price matching and loyalty programs can also help stretch your grocery budget. Other suggestions include:

• Buy in bulk whenever you can to reduce your overall costs
• Meal plan for the week based on what’s on sale
• Switch to less expensive protein options, such as beans
• Purchase dried beans instead of canned
• Reduce your meat intake
• Price match if your grocery store allows it
• Join the store loyalty program so you can earn points that can be redeemed for free groceries later.

Building financial confidence for the year ahead

If all of these financial headlines have left you shaken, you’re not alone. According to the fifth annual edition of the IG Wealth Management Financial Confidence Index the “financial confidence” of Canadians dropped by 11% in 2023, compared to 2022 and over the last few years it only got worse.

If you’re feeling uncertain, consulting a financial advisor could help you set clear priorities and develop a plan tailored to your situation. Remember, improving your financial outlook begins with small, deliberate steps — whether it’s building an emergency fund, paying down debt, or investing for the future.

Bottom line

Even though many Canadians are still confident about their individual situations, there’s no denying that what’s happened in the last year has had some impact on their budgets. Looking back at what’s happened can help, but don’t let it leave you in a shock. It’s always best to plan for the future. How you do that will depend entirely on your personal situation.

The financial landscape in Canada has shifted significantly in recent years. While challenges remain, there are clear signs of progress, such as declining debt ratios and interest rates. By reflecting on the lessons of the past and planning strategically, Canadians can take control of their finances and face 2025 with greater confidence.

— with files from Romana King

Sources

1. Statistics Canada: Household credit market debt to household disposable income, seasonally adjusted (2024)

2. Statistics Canada: Household sector credit market summary table, seasonally adjusted estimates (Dec 12, 2024)

3. Statistics Canada: HNational balance sheet and financial flow accounts, third quarter 2024 (Dec 12, 2024)

4. IG Wealth Management: Financial Confidence Index (2023)