Understanding Your Personal Debt Load

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Understanding Your Personal Debt Load
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• Almost every Canadian household has some form of
  debt or another. And while taking on debt has
  become a part of Canadian life, its important to
  have a thorough understanding of your debt
  situation, and where it is taking you. Many of us
  have debt products thrown at us (every month I
  get blank cheques in the mail from credit card
  companies telling me to spend, spend, spend!) and
  knowing what to do takes education and
  discipline.
• I like to keep things simple, in my mind there
  are two broad categories of debt Good Debt and
  Bad Debt.

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• Good Debt Includes a reasonable mortgage,
  investment debt and student loan debt. Of course,
  there are limits here are some notes on each
  one
• Mortgage Debt This should be less than 3X your
  annual salary. So if you/your family earn 100k
  per year, your max mortgage should be 300k. Note
  there are some minor exceptions here, but this is
  the rule of thumb I follow myself.
• Investment Debt Borrowing money for stable
  investments, especially when invested in an RRSP,
  can make a lot of sense. Note that you should be
  paying this loan back by the end of the current
  year.

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• Student Loan Debt Borrowing for your education
  is good, provided the program has employment
  potential and you can pay off the amount borrowed
  in roughly 5 years.
• Bad Debt We all know when we are spending above
  our meansif you cant buy it with cash, should
  you really be buying it at all? Bad debt includes
  the following
• Consumer Debt T.V.s, vacations, clothes, kids
  toys, and any other item that is not a necessity
  (i.e. food, shelter or water).

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• Too Much Mortgage Debt Any mortgage over 3X your
  annual salary is leaving you very exposed to
  interest rate changes. I know several people with
  an 800k or higher mortgage If interest rates go
  to 6, it literally doubles the required monthly
  payment. Can you afford your mortgage to double?
  I will be doing a separate blog on interest rates
  in the coming weeks.
• Frivolous Student Loan Debt If you are uncertain
  your education will get you a job, do not borrow
  money to fund it. Now, I am not saying a Fine
  Arts Degree isnt a good education, but I am
  saying dont borrow money to do it.

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• I have met countless 30-somethings still paying
  off an education they didnt really want/didnt
  really use and, of course, they now wish they
  never went to school. Universities and colleges
  are in the business of graduating students and
  not necessarily in the business of helping you
  get gainful employment.
• Our current spending culture is a now culture
  we want instant gratification to satisfy our
  cravings. This impulsive and unprepared spending
  can lead to bankruptcy, especially if you are
  faced with a sudden change in income. Being
  disciplined is hard (I struggle with it from time
  to time as well!).

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• When reviewing your debt, here are a few things
  to ask yourself
• How much do you annually spend on interest? Take
  a deep breath, sit down and add it up. If you pay
  more than 10,000 of annual interest, that is an
  absolute sign that you have acquired too much
  debt. Imagine what you could do with another
  10,000 of cash?
• Are you paying your credit card bill off
  entirely, every month? If not, then why are you
  spending more than you earn? That is a good sign
  that you are acquiring too much material debt.

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• Keeping track of your net worth year over year
  can also give you an idea of your debt. Your net
  worth is your assets, less liabilities year
  over year. Is your net worth getting bigger or
  smaller?
• Those are all ways to give yourself a quick and
  healthy self-review of your debt so that you can
  better take control of your debt and, ultimately,
  your financial future. Interests rates usually
  only go one way up. A 1 change in interest
  rates can create a significant bump in your
  monthly payments, as outlined in the chart below.

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• 500k mortgage, 25 years at 3 2,366 monthly
  payment
• 500k mortgage, 25 years at 4 2,630 monthly
  payment
• 500k mortgage, 25 years at 5 2,908 monthly
  payment
• Could you handle a 300 600 increase in your
  mortgage overnight? Canada is a country that has
  been spoiled by low interest rates for more than
  a decade. Many experts are predicting an interest
  rate bump of 2 within in the coming years.

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• You need to have a financial plan that clearly
  shows what your income, expense, investment and
  debt horizons look like so that you can determine
  if your spending is taking you down a path that
  is unwise.
• It is critically important that you gain a handle
  on when you will become debt free. Entering
  retirement age with any debt will significantly
  limit your ability to have a comfortable
  retirement. In my opinion, a healthy retirement
  starts with roughly 2,000,000 in an investment
  account and no debts at all. Of course, there are
  always exceptions give me a call and we can
  discuss your personal situation.

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• Kent Accounting is a full service accounting firm
  located in Calgary, Alberta. The firm is lead by
  Kent Greaves, a 'CPA in Calgary' with over 18
  years of experience working with privately owned
  companies. As a tax accountant in Calgary, Kent
  believes in prompt, accurate service at
  affordable rates. Hiring Kent Accounting to file
  your tax return in Calgary or to do your
  bookkeeping will allow you to rest assured that
  your books are accurately kept and will free up
  your time to engage in your business in the
  activities that you are best at.