Part 1: How much debt is too much debt?
Everyone always says “Don’t fall into debt!” – but that’s a lot easier said than done.
Most of us are bombarded with opportunities to borrow money, from student loans to layaway plans for large purchases. We are regularly taunted with offers to sign up for credit cards at every bank and department store, while ads encourage us to spend beyond our means for non-essential items.
Debt can come in many forms and many levels of severity, from owing money on a line of credit or a credit card to borrowing money from a friend and being unable to pay it back. Debt can get out of control fast as well if something unexpected happens, like losing a job, dealing with an unexpected emergency or some emotional issue.
Some recent studies suggest debt can affect many areas of Canadians’ lives, from their general mood and sense of well-being to their plans for retirement.
Most people can’t manage without using some form of credit, whether it is a loan for an essential purchase or needing a credit card to buy things online or rent an apartment, says Patricia White, executive director of Credit Counselling Canada. But it is a bit of a Catch-22 – once you have a credit card or line of credit, it is pretty tempting to use it.
How can you tell if your debt level is too high? One rule of thumb is if more than half of your income is spent paying off debt, you have too much. There are also some other signs to watch for.
Early warning signs you may be in trouble
- You can’t get to the end of the month without running out of money.
- You don’t have money set aside for emergencies. Although the ideal emergency amount varies for everyone, $1,000 is often used as a ballpark figure. White recommends allotting three to six months’ worth of living expenses.
Five signs it has gone too far
- You’re using a credit card for essentials.
- You’re borrowing from one source to pay off another, be it a family member, loan, credit card or outstanding payment.
- Your finances are causing you to lose sleep or affecting your health.
- Your financial situation is distracting you, affecting your work performance, or even causing you to miss days of work.
- You’re regularly receiving collection calls.
Though debt can be scary, it is possible to control it, and ultimately get out of it, by taking simple steps.
White, who has been helping people control their debt for 40 years, has three simple techniques that will keep spending on track. She explains them in Part 2 of our debt series, Three simple tips to keep debt in check.