Are you in too much debt? What is your debt level? I answer all these questions! Since 2000, almost 100,000 Canadians have filed for insolvency each year.
If you are not familiar with the term, insolvency happens to be the situation of a person who cannot pay his debts. There are already a few possible solutions to this, such as debt consolidation, but the vast majority of situations result in bankruptcy. And that hurts!
Cause and debt ratio
Where does this increase in debt come from? What is the principal purpose? I would say that the low-interest rates of recent years and also the ease of access to credit are the main factors. But especially when it is consumer credit! It’s easy to put everything on a card and postpone payments while paying the minimum!
A clue to see if you are too indebted is to calculate your debt ratio. Here’s how. You take the amount that your debts (student loan, mortgage, car payments, etc.), and you divide it all by your net income (after-tax), and you put it all in percentage.
For example, let’s say you have a student debt of $ 10,000, and you earn $ 25,000 after tax.
So you have a debt ratio of 40%. That means that for every $ 100, you owe 40. It’s still a lot! According to several financial experts, the ideal debt ratio should be 15 to 20% maximum. If you have a mortgage, you can go from 35 to 40%. Not bad, but the majority of Canadians are in debt at over 160% of their salary! This is too much!
Four signs of over-indebtedness?
Now, I can give you some clues that prove that you have too much debt!
You use two credit cards each month and more. Like I told you, it’s easier to put everything on a map!
You only pay the minimum of your card balance instead of paying the full amount.
More than 20% of your income is used to pay off your debts.
You are stressed and anxious when you think about your debts. It is undoubtedly stressful!
Three tips for paying off debts
Now how can you get rid of your debts? Well, by paying them! Yes, good… Easier said than done… But here, I can give you a few tips.
First, identify the debts that have a higher interest rate and focus on paying them first. Because paying interest is like money in the trash, and it sucks!
Then, if you have several debts, try to see if debt consolidation is possible. This insolvency procedure is to be undertaken because you can consolidate your debts in one place, and they will all have the same interest rate.
Then see if you can cut unnecessary spending. I’ll talk more about the budget part, but it can be the home phone when you can only have a cell phone, a gym membership when you can work out at home, make your coffee at home instead of to stop at Tim Horton every day and so on!
So if you have debts, know that it is possible to get out of it if you adopt the right strategies. Once you have identified the signs of over-indebtedness, you can assess your situation. Soon I will show you a quick debt payment tip!
Good or bad debt?
And if I tell you that there are good and bad debts, are you going to call me crazy? But no! It exists! And it’s less rocket science than you might think!
Good debt is an asset that brings you money. It is when others “pay” the debt for you. Good debt is an asset that brings you wealth, whether you work or not. Also, its value increases over time.
Typical examples of good debt are apartment buildings, investments, a business you own, etc.
As for bad debt, it turns out to be the opposite. It is a liability, a good, or an object that costs you money, and that depreciates over time. You pay this liability with the net dollars (after-tax).
Examples, there are in mass and more than you can think of! I can cite a boat, a car, a swimming pool, a spa, a chalet that cannot be rented, etc.
Good debt? Surprise!
Also, there are things you would not consider bad debt. It is the case of a house because it costs you money, but it is an asset for your banker because you “pay” his debt and bring him money.
On the other hand, if you rent your house or make it an apartment building, it becomes an asset because it earns you money.
It is the same with a car that is a bad debt because of payments, gas, maintenance, and insurance. But it becomes an asset if you change it into a taxi because it brings you money!
In the case of a business, the latter is not an asset if you are the only one working there. On the other hand, if it generates income such as online training or if you have employees working for you, it becomes an asset.
Having good debt means having debts that bring you money, as in the examples I have presented to you. Never spend money that you do not have (ex: going out, buying an item on your credit card, but paying the minimum balance).
It will put you back in the vicious cycle of debt! If you don’t have the money in your account to buy it now, or if you don’t have the money to pay off your entire card at the end of the month, you don’t buy it!
So, yes, there are good and bad debts. And you, do you have more good or bad?
In this video, I present to you the Snowball effect or the Snowball Effect. The first time I heard of this was in an article on Warren Buffet, one of the greatest businessmen of the century!