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Financial planning tips

December 14, 2011

Five easy debt management tips

Canada’s debt-to-income ratio is at a record high. If you’re worried about yours, here are five simple ways to manage your spending.


We saw new, unsettling numbers from Statistics Canada yesterday on household debt. Collectively, we owe $1 trillion in mortgage debt as of the third quarter of this year. Meanwhile, consumer credit card debt has risen to $448 billion. Household credit market debt (consumer credit, mortgage and loan debt), measured as a percentage of personal disposable income jumped to 150.8%. That’s the highest percentage Statistics Canada has reported since it began tracking this data in 1990. It’s also higher than the debt-to-income ratios in the U.S. and Britain.

There are a couple of ways to look at these figures. You can take the view that Canadians, having remained relatively protected from the tougher realities of the global financial crisis, are taking advantage of historically low interest rates. To the extent that this credit is being used for good debt — real estate and post-secondary education are two common examples — it’s not unreasonable to conclude that a lot of this borrowing is the result of good, thoughtful decision-making.

Alternatively, you can worry that Canadians are walking into the same debt trap that has triggered mass deleveraging among consumers around the developed world. Will we look back on the period between 2008 and 2012 and wonder how we could have ignored the lessons all around us?

I’ll leave it to policymakers to grapple with that one. What I can offer are five straightforward tips you can start applying today:

  • The Canada Mortgage and Housing Corporation (CMHC) advises that your monthly housing costs (including mortgage payments, property taxes and heating expenses) shouldn’t exceed 32% of your monthly income (before taxes and other deductions).
  • CMHC also recommends that your total monthly debt payments not rise above 40% of your monthly income.
  • Credit Counselling Canada offers a couple of guidelines on monthly budgeting. Set aside roughly 35% of your take-home pay for rent or mortgage payments, 25% for day-to-day expenses and 10% for savings. My advice on the remaining 30%? Pay your utilities bills (and your taxes), and then prioritize your debt payments based on the interest rates being applied. Do whatever you can to pay off the most expensive debt first.
  • Everybody knows what bad debt is. It’s often on your credit card, so the interest payments are high. And it’s almost always taken on for something that either depreciates in value or is consumed outright. Think plasma televisions and concert tickets. Good debt is a bit trickier. Student loans may make sense in a normal environment, but in today’s job market that investment doesn’t guarantee a return. Even good debt can get you into trouble right now.
  • This is not to say that we should all strive for a debt-free existence. There will be circumstances in which taking on a reasonable amount of debt in order to buy something you genuinely need makes sense. It’s better to take on affordable monthly payments at a manageable interest rate than it is to drain your cash reserves

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