Financial Friday #105: Is DEBT really a four-letter word?

Debt seems to be a way of life for the average Canadian and we are bombarded with statistics about it to remind us:
  • Total Canadian household debt $2.2 trillion ($1.5 billion mortgage / $700 billion consumer).
  • Average consumer debt: $20,000.
  • $1.73 in debt for every dollar earned.
  • Average credit card debt: $4000.
It’s easy to buy into the "debt-free nirvana" and there are a lot of ideas and advice on how to get there, but what would you have to give up to be debt-free free and how much is your debt really affecting you? Ask yourself these questions:

Why do you have debt?
You can have debt for a number of reasons and some of them are unavoidable — you may have lost your job during the pandemic or had an accident or medical issue that limits your ability to work. However, the majority of debt we see is from people who earn a steady income and for one reason or another have spent themselves into a corner living beyond their means. Did you rack up your credit card buying groceries or buying drinks and restaurant food?

The first step is to figure out if you make enough money to take care of your basic needs (food, housing, transportation). Take a critical look at your spending and separate out the needs from the wants — from the type of house you live in to what you drive to what you eat. You need to determine if it is your lifestyle or just survival that is driving you to debt.

Cost of debt?
Creditors don’t want you to think about the cost of debt and with very low interest rates on some debt, it can be easy to ignore. A mortgage at under 3% is a good deal and making huge lifestyle sacrifices to pay it down early doesn't make sense for a lot of people. Home equity is also a great source of low-cost financing for things like education or investing.

Credit cards, car loans, and lines of credit are another story. You need to investigate just how much interest you are paying every month and whether or not it is as cheap as you thought. Minimum payments, low monthly payments, interest only payments, cashback offers, do not pay until later deals, and excessive credit card limits are all very conducive to keeping you in debt forever by duping you into thinking you can afford it.

Does your debt keep you awake at night?
Not all debt is bad – are you awake at night analyzing the merits of a fixed vs variable mortgage or your latest credit card balance that is 95% entertainment and recreation related? If you have come to the point where your debt is constantly weighing on your happiness and enjoyment of life then you need to take action. This could mean a number of things: downsizing your home, selling your car, giving up a vacation, or simply tracking your expenses and cutting back wherever you see fit.

Is it worth the sacrifice? The slipperiest of all slopes!
There are opportunities and experiences that may never come by when you are older or richer, so some degree of "you only live once" (YOLO) is required. You won’t forget the memories from that amazing lake cottage you splurged on for a family weekend, but the car you drove to get there isn't important (no one will remember 20 years from now and there are plenty of shiny new cars every year!). Make sure to choose your "YOLO moments" carefully and prioritize what really matters when making spending decisions.


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