Don’t be a statistic

Don’t be a statistic

Hard on the heels of the news release stating that the Federal Task Force on Financial Literacy had released their findings and recommendations came the news headlines that the Average Canadian family’s debt hits 100K.  Timely you say? Absolutely.

According to a report  from the Vanier Institute of the Family, Canadians are indeed more deeply in debt than at any other time in our history. It seems as though despite several warning calls from those who know, we as a nation are heading -eyes wide open-for disaster.

Easy credit and lower interest rates have lured us into leveraging far more of our disposable income than is perhaps prudent or safe. As the report succinctly states “There is too little income, too much spending, too little saving and too much debt.”

What I find interesting, is that accompanying the record levels of debt, is the astounding statistic that we have also seen a jump in average net worth of 60% in the same time period. So as Canadians, we are much wealthier, yet we still carry a boatload of debt. What’s up with that?

Is this something to be concerned about? Only if you are one of the grim statistics.

So, how can you tell if you are in over your head or in dangerous territory?

Okay, you need a few math skills here. There are two stats you need to look at.

One, your total debt service ratio. If your monthly debt payments (including housing costs) are more than 40% of your net income (yes, net income not gross), you are in dangerous territory.  Time to concentrate on lowering that ratio.

Two, your net worth.  Or more specifically, your debt to net worth ratio.

Your net worth is a measure of all your tangible assets.  Check out this handy net worth calculator .  Be sure not to overestimate the market value of your assets.

Next divide your total debt by your net worth. If this number is high, then selling your assets may not cover what you owe. If this number is over 1, you could be in trouble. That means if you sold every asset you had, you would still be in debt.

Don’t be a statistic. If these numbers concern you, or if you need help interpreting what they mean, give us a call.

Improving your finances is what we are all about.

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