When it comes to debt, it’s difficult not to evoke the image from Greek mythology of Sisyphus, who was doomed to an eternity of rolling his boulder up the hill only to have it roll back down again each and every time. Or perhaps debt is better analogized with the snowball effect: a continuous build-up that careens beyond your control.
Call it what you will, Canadians are well acquainted with debt.
How Much Debt Is Too Much?
More than one in 10 Canadian homes are “highly indebted” with mortgages, credit cards and other types of debt, says a recent poll by Ipsos Canada.
It’s a slight improvement from 2012, when 13.5 Canadian households carried a debt-to- income ratio of 163 per cent or more.
Despite the recent moderation, that debt-to-income ratio has seen a steady rise since 2006, mostly catalyzed by the housing boom – which the Bank of Canada has called the biggest domestic risk to the financial system.
To give you a benchmark, in 1980 Canadian household’s debt-to-income ratio stood at around 66 per cent.
Will History Repeat Itself?
The current hot button question among the media is whether Canadian debt levels will reach the level of U.S. household debt in 2007… just before the economy went kaput.
Well, yes, and no.
On paper, the fourth quarter’s red alert debt levels were on par with the U.S.
However, as a recent report by TD Economics points out, there are too many differences between the information gathered in each country to represent household debt like for like.
For example, Stats Canada removes interest payments on non-mortgage debt from disposable income, while U.S. figures do not.
“There are differences in the methodologies used to calculate both debt and income,” Diana Petramala, an economist for TD Economics, told the Financial Post. “There are also differences in how health care is funded in Canada and the U.S. that should be factored into the amount of personal disposable income households have to help service their debt.”
Where Canada Really Stands On Debt
To save you the panic attack, the Canadian housing boom is leveling out and even still, household debt levels aren’t as close to those of the U.S. as the slew of media musings would have you think.
However, you’ve made it this far – so why not temper your debt while you’re at it? A good benchmark for your debt is 36 percent of your income. If it reaches that level it’s time to get proactive.
Here are a few tips to keep in mind so you don’t take on too much debt:
Increase the monthly amount you pay on your debts. If you can cut back on a few luxuries like dining out or buying lunch/coffees each day, that money can go towards you’re debt and you’ll feel a whole lot better.
Avoid taking on more debt. All those “sweet deals” with genereic letters about boosting your line of credit or doubling your credit card limit are designed to get you spending money with the bank. Great news if you have it to spend. If you’re in debt already, they might be better suited to the recycling bin.
Put off the big purchases. Los Cabos will be there next year, I promise. That’s a chunk of your debt that could be paid off. Plus, when you have more savings the trip will cost less as you want have the interest to pay for putting it on credit.
Keep track of your debt-to-income ratio. Reward yourself (in a non-monetary manner if possible). Set a benchmark for yourself and stay the course.