Every few months there’s a report on the news telling us what the average debt-to-income ratio is in Canada. This number is used, in theory, to tell people just how bad their debt level is and, on a larger scale, to help analysts determine just how precarious our national financial situation is.
Calculating Your Debt-To-Income Ratio
Methods vary, but in Canada you typically calculate your ratio by adding up all of your debt (including credit cards, lines of credit, mortgage, etc.) and dividing that number by your after-tax income.
For example, if you have $80,000 in debt and earn $60,000 a year after-tax, your number is 133% ($80,000/$60,000 x 100).
In February the Canadian average was 152%, meaning, on average, we owe a full one and a half times our annual after-tax income on debt.
Type Of Debt Matters
Of course if you just purchased a home, that number might be substantially higher. If, on the other hand, you don’t own a home and you’re hovering around that number due to credit cards and lines of credit, you have a serious debt problem.
Looking At Things Another Way
Here’s another statistic that we don’t see very often: 72% of Canadians are in debt.
On the other hand, the average net worth of a household in Canada is now over $350,000.
There’s not enough data here to make a firm conclusion, but it presents an interesting question. If almost three quarters of us are in debt, but our household worth is $350,000, is debt really such a bad thing?
If you have substantial assets (most likely a home), and selling that home would clear all of your outstanding debts, then from one perspective you’re not really in debt at all. Your overall net worth is positive, you’re just locked out from getting to your money easily.
On the other hand, that debt you carry is still an on-going obligation on your part. You can’t escape or deny it – it will follow you around until you pay it off.
Is Your Debt A Burden?
Some people are ok with debt. As long as the monthly payments are manageable within their budget, they see it as an acceptable means to an end. As many find out, however, that a sudden change in income or living situation can turn that manageable payment into an anchor around your neck.
The real truth is that being in debt really is a type of slavery. You can run to the ends of the world, but those numbers will follow you everywhere.
Being debt-free, however, is one of the most empowering feelings you will ever have. Owing nothing to anyone means each dollar is yours to do with what you want. Go anywhere, do anything, and no one will come after you for their share (assuming we’re talking about after-tax money of course).
No one who ever worked their way out of debt said to themselves “I’m not happy with this, I’m going back in debt”. We’ve been trained to think that being in debt is normal, that it’s just the way you have to do things, but just because the majority does it doesn’t make it right (and is frequently strong evidence that it’s wrong).
Finding Role Models
No matter what the topic is, there are always people who go against the grain. If you assume people in their 60’s stop doing intense physical activity, go look for examples of people who are still extremely active and learn more about them.
Similarly, just because everyone around you is in debt, doesn’t mean they’re right. Go find some examples of people who chose the road less travelled – who worked their way out of debt or never had it to begin with, and see how they’re living.
Getting out of debt is a personal journey that requires discipline, focus, and planning. Making that last payment will be one of the greatest feelings you’ve ever had, and will make all of your sacrifices and tough choices worth it.