Being in Debt, What Does it Really Mean?

Being in Debt, What Does it Really Mean?

Written by Caitlin Wood
Last Updated October 21, 2015

It feels like there is always some kind of report on the news, online or in the paper explaining to us what the average Canadian household debt is, how that debt was created and how it’s a symptom of a larger economic problem either on a national or world level. Since debt seems to be an extremely popular topic and it’s on everyone’s mind, we want to know what it really means to be in debt.

The Debt-to-Income Ratio

There are various methods that are used in the calculation of this ratio. In Canada however, it is achieved by adding all the debt an individual has, this includes mortgage and credit cards. The sum is then divided by the total earnings at the moment of calculation, minus the taxes. Here’s an example to illustrate how it work:

The total debt of Ann is $80,000. In a year she earned $60,000 after tax.

$80,000/$60,000x 100

Her debt is at 133%.

The average rate of debt in Canada is 152%. This means that on average, Canadians owe more than one and a half of their earnings after-tax on current outstanding debts.

What Types of Debts do You Have?

From the country’s average, it is obvious that most people in the country are in debt. The type of debts that you have greatly affects how well you’re doing financially. If the ratio is significantly high due to a recent mortgage that you took out, then there is no need to worry as a mortgage is a type of investment that the average person has prepared to make. However, when the number is high as a result of too much spending and too many maxed out credit cards, there is cause to be worried.

A Different Perspective

Sometimes it’s important to look at debt with a different perspective. Statistically speaking 72% of Canadians are in debt. But on the other hand the average Canadian household net worth is pegged at a comfortable figure of $350,000. So what exactly does this mean? If most of the population is in debt, how come they have a household net worth of 350,000? Generally speaking we can assume that debt is not a burden on the general population.

Of course it’s not that simple, debt means something different to everyone and it affects everyone is a variety of different ways. So when does the debt start to become a burden?

When Does Debt become a Burden?

For most people, being in debt is a means to an end that is necessary. Once they are able to meet their monthly payment obligations within their budgets, the cycle can go on indefinitely without them caring any less. However, a change in financial situations can shake things up to their detriment or in the few circumstances, for the better. When the means to pay the obligations either monthly or quarterly are no longer available, dealing with debts can be a nightmare. Typically this is the moment when debt becomes a burden, when you lose your ability to make full payments on time.

If your debts have become a burden then it might be time think about changing your repayment plan. If you’re currently tackling your debts in a certain way you might want to change it up, rethink you spending habits, get a second job or increase your payments. Look at your debts from a different perspective and think about new ways to get the money you need to become debt free.

What does it Mean to You?

We know what being in debt is, it means you borrowed money you didn’t have and are now required to pay it back, plus an interest you may have accrued, within a certain period of time. But what does being in debt mean to you? Is begin in debt a huge issue in your life? Are you constantly worried about making your next payments on time? Do you feel like there is no end in sight? If this is exactly how you’re feeling then the type of debt you have is not good and needs to be dealt with right away.

How does your debt make you feel? This is extremely important as you are the one that has to deal with it every day. Don’t let anyone else tell you how you should feel about debt.

Need Help With Your Debt?

If you’ve decided that being in debt is not something you want and you need help getting organized, creating a budget and paying off your debts then you might want to seek the help of a professional credit counsellor or enter a debt consolidation program. Do some research and find the best option for you and your debts.


Rating of 3/5 based on 4 votes.

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

Borrow $500-$50,000

Borrow $500-$50,000
NEW!

Don’t pay until March with this offer from our partner, Fairstone.* Ends January 31st.

View Offer
Cashback & Bonus Offer

Cashback & Bonus Offer
Ends March 1st, 2023

New Offer! Get up to $2,000 cashback + a $50 bonus on signing up. Conditions apply.

View Offer
Earn 5% Cash Back With Neo

Earn 5% Cash Back With Neo
No annual fee!

Earn an average 5%¹ cash back at thousands of partners and at least 0.5%² cashback guaranteed.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month
Popular

With KOHO’s prepaid card you can build a better credit score for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates
Icon

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.