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 is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. 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. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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