What is the most common four-letter, dirty word in Canada? Debt. People shiver at the sound of it and dread having to face its wrath. However, for most Canadians, debt is a daily reality. With the average Canadian holding $8,500 in debt, this is a dirty word most of us can’t escape. There are also some interesting philosophical findings when it comes to the mentality of Canadians living with debt. A recent fall 2019 survey by Manulife found that two-thirds of Canadians in debt also assume everyone else is in debt as well.

Living with debt

Living with debt is a reality for a large number of Canadians – but it’s interesting to see the mentality effects that debt can have. Although in a perfect world we would all live debt-free, debt doesn’t necessarily have to be a bad thing. Sometimes, investing in yourself or family and taking on some debt is necessary to help you improve your condition and bring you to the next stage of your life. Debt only becomes a dirty word when it is unmanageable and ineffective. 

To help remove some of the fear of debt, I’m going to break down some of the most common reasons Canadians are in debt. With this understanding, hopefully, you can become more effective at taking on and managing debt and lessen your fear of the word. 

Reason #1 – Biting off more than you can chew 

As I mentioned, debt doesn’t have to be a bad thing. Going to school to improve your skills, taking out a loan to purchase your dream home, or spending a little extra on getting your children the resources they need, are all valid reasons to take on debt. Debt only becomes a problem when you are taking on more than you can manage. Taking out multiple loans and excessively overspending what you have in the bank is dangerous. These actions will lead to your debt growing rather uncontrollably, leaving you feeling helpless and stressed.

Solution – Make a budget 

Budgeting can be a great way to help you visualize how much debt you can afford. By laying out all of your income, expenses, and obligations in front of you, it will become much clearer on what is manageable and what is not. Once you have an idea of what debt you can take on, your budget can then be used to make sure you are staying on top of payments and avoid becoming overly leveraged.

For more information on how to create a budget, check out our previous blog post here.

Reason #2 – Falling into the credit card trap

What’s the difference between handing a $20 bill to a cashier vs tapping our credit card against the machine for the same amount? Our mentality often fails to register the “tapping” as the same financial transaction. When it comes to credit cards, it’s easy to forget that we are spending actual money every time we use our cards. Consequently, credit card debt has become one of the largest sources of debt for most Canadians.

Solution – Utilize apps

Many banking institutions and third-party providers offer apps that can help you stay on top of your credit card spending. Apps like TD My Spend will send you notifications for when your credit card spending starts to get excessive and will bring you back on track. These apps can be a great way to help make credit card spending more tangible and real so that you avoid falling into the trap of spending blindly. 

Reason #3 – Falling behind on payments

Repaying the debt you’ve accumulated can often become a vicious cycle if you do not stay on top of your repayments. Outstanding debt accumulates interest, so every time you make a payment, the principal amount decreases. Therefore, this reduces the amount of interest that will be charged between now and your next payment. When you miss a payment, however, the principal will not decrease. Therefore, you will end up being charged more interest than you otherwise would have. This works against you by having a single missed payment increase your debt rather than work towards relieving your burden. And it gets worse. With missed payments come late fees and so your debt accumulates even more with the addition of this fee. This is the vicious cycle of the debt repayment process. 

Solution – Set up automatic payments

Setting up automatic payments or alarms to prevent you from forgetting your debt obligations is a great place to start. You don’t want something as silly as forgetfulness to be the reason your debt continues to accumulate. Making a budget (see solution #1) will also be very useful and it will help to ensure that your monthly saving and spending behaviour is structured. This will help you ensure you have enough left over to cover your repayments. 

Debt can be something that’s difficult to talk about and hard to deal with mentally. However, the more knowledgeable you are about it, the easier it gets. When your mortgage plays a large role in your current debt, talking to a mortgage professional can really go a long way.

If you’re concerned about your debt when looking to purchase or refinance, I can help you find the right solution that will suit your financial needs and make your debt load as manageable as possible. Call me anytime or contact me here to book your free consultation!