If you feel you have too much debt, what to do about it can keep you up at night. The real question is: how much debt is too much?

The term “too much debt” is actually quite relative. Rather than relating to a very specific number, it most often refers to an individual’s feeling that they don’t earn enough to cover their debt load. When people visit our office asking if they have too much debt, this is usually the case, and the answer is almost always in the affirmative.

As we grow and mature, we want more material things that, as a result, bring more financial responsibility. Life events such as getting married, having children, buying a home, and owning a vehicle make our financial life increasingly difficult.

Our mandatory expenses grow as well, and we often become reliant on shared income so we can face those unexpected or last minute bills that come from raising children, the car breaking down, or when the furnace quits on the coldest day of the winter.

Mortgage, Credit Card, and Other Regular/Fixed Debt

Many of us remember our parents living on a budget scrawled out on a piece of paper or in a ledger. They always strived to stay on budget, but sometimes things happen that cost a little extra. Going over budget meant sacrifice, such as fewer dinners out or no family drive-in movie night for a few weeks while your parents caught up on the bills.

These are simple but important lessons for children. Even today, there are those who will tell you that the keys to financial security are knowing your budget, keeping track of expenses, and spending less than $1 per month that you earn.

In other words, the less you understand how much and on what you spend your money each month, the harder it will be to control your spending. You can’t change what you don’t know.

This doesn’t mean you have to track your spending to the exact penny, but you do need to plan around and budget for certain fixed expenses that you know come up every month, such as:

1. Mortgage/rent
2. Transportation: car payment/transit pass/gas
3. Life and health insurance
4. Food
5. Income taxes
6. Credit cards
7. Utilities (heat, hydro, and water)
8. Daycare

Failure to pay any of these items will have an impact on you personally and financially, as some carry heavy interest penalties or cancellation of services for missed payments.

By better understanding these fixed expenses, you’ll be able to plan for any unexpected expenses that might arise. If you can manage to live under budget, you’ll be in an even better position to absorb additional costs, or afford little extras to treat yourself or your family.

It sounds easy in theory, but keeping a budget on track takes discipline. If you fall behind, accessing quick cash might seem like the ideal short-term solution, but the long-term effects can make the situation even worse.

Are Credit Cards and Loans Financial Mousetraps?

As discussed in a previous article, our financial goal shouldn’t be to live debt free or be financially independent. Instead, we should use debt wisely to achieve the lifestyle we desire.

Most of us wish to accumulate assets, such as a home, car, cottage, boat, or whatever else we desire. To be able to do this, we need to learn how to control our debts.

Currently, with easily obtained (and even easier to use) debit and credit cards, as well as quick access to cash from lenders or payday loan companies, keeping the income in balance with your debt can be a difficult task.

Credit and debit cards especially make spending easier. After all, you don’t actually see the money leaving your wallet, and in the case of credit cards, you won’t even see the bill for weeks. And when it does come, you have the option of paying a small minimum amount that might actually fit your monthly budget.

But few things blow long-term financial health like accrued interest on an outstanding credit card balance or falling behind in unsecured loan payments.

For example, let’s say you have a balance of $10,000 on a credit card that carries a 24.9% rate of interest. Making only the minimum payments over time may hurt your credit score, and make it very difficult to use and obtain other forms of credit. As a result, you’ll be locked in a cycle of making small payments for years, which will cost you thousands of dollars.

In the above example, paying $400 per month will take you 36 months to clear the balance, and cost you over $4,200 in interest charges – and that’s assuming you don’t use the card for anything else during that period.

You could probably use that $4,200 for something other than handing it over to the bank and getting nothing in return. This is why you need to be careful not to go over your monthly credit card budget to avoid falling into that repayment mousetrap.

Why Mortgage Debt is Good Debt

As previously mentioned, going into debt is inevitable to get the things we want. Few people can simply write a cheque to buy a house outright. The rest of us have to take out a mortgage.

However, buying a house with a 3% mortgage is considered good debt, especially in the Greater Toronto Area where pricing on homes is expected to keep rising. Another form of good debt is a line of credit secured against your house, especially when it’s used to make improvements to your property that will increase its value.

These debts could arguably be considered investments, because down the road you’ll be cashing in on an asset that has appreciated significantly. In the meantime, be sure to work your mortgage and line of credit repayments into your budget.

Find Out How Much Debt You Have

If you think you have too much debt and don’t know what to do, give us a call. We will be happy to review your financial options and discuss debt solutions that will bring you debt relief and protect your long-term financial health.

We also offer a 30-minute “Learn Your Budget” discovery session that will help you build, understand, and stick to your budget. Like most licensed insolvency trustees, we want to see clients maintain a positive financial picture, and this session has been designed to help you do just that. Call our office anytime for more information.

Robert Charles, B.A., CIRP, Licensed Insolvency Trustee, is the founder of Charles Advisory Services.

For every debt problem, there’s a debt solution. Since 2006, Licensed Insolvency Trustee Robert Charles and his team at Charles Advisory Services have helped individuals, families, and businesses in Toronto move beyond debt towards financial health. Contact us today for a free consultation.

TIP: Make your budget your friend. Don’t consider it something that restrains you from spending money, but rather something that will get you where you want to be financially. The more you embrace your budget as something good, the more likely you’ll be to stick to it.