What type of debt controls you?

Good debt and bad debt can seem the same when each month it is a struggle to make payments and meet all of your other financial obligations. The number one financial priority for Canadians year after year is to pay down debt – but for most – it is an elusive goal. By 2003 the average Canadian household owed more than their annual take home pay. How did this happen?

There are two basic types of debt; starting out debt and lifestyle debt. At first glance it would seem that starting out debt is likely good debt and lifestyle debt is bad debt – but for each there are good and bad debt components.

Starting out debt

This is the start of an individuals’ debt lifestyle and typically is made up of credit card expenses for furniture, computers, car loans, student loans and sometimes mortgages. Most of this debt is classed as good debt; student loans, computer and the mortgage are all good because they increase the individuals net worth over the long run. But even though it is good debt there is a downside.

Young Canadians carry the heaviest debt loads but at the same time are the poorest group. Makes sense, most are just starting their careers and are not commanding high salaries. However, recent statistics indicate that this groups’ median net worth is declining. The reasons for this: significant increases in education, housing and child care costs. These factors combined with how easy it is to get credit has given rise to a generation of young Canadians that are starting out in poor financial health, with little room or opportunity to get out of debt quickly. It is still possible to get on the right track but the commitment to financial health needs to start as soon as possible.

Lifestyle debt

Just the name conjures up images of people living beyond their means and not paying attention to their financial health. It is not that simple. In years of economic prosperity and low interest rates individuals are able to finance more of what they want, for less cost. In the past few years data shows that the increase in Canadian debt levels has increased two times faster than income levels. That is not a good thing. Some of it is good debt, like mortgages, that when fuelled by lifestyle choices can place an individual in a tight financial position when interest rates rise, or the economy starts to change. At the time everything seems fine, and it most likely is, but many leave themselves open to disaster should there be any type of shift in their financial situation.

Just as you thought - lifestyle debt can also be bad - and there are lots of reasons we can get trapped in a bad cycle. Whether it is tempting lifestyle choices that we just can’t afford but can’t seem to say no to or some other reason - living in a consumer culture coupled with a declining savings rate and over-abundance of credit can make even the most careful consumer fall into poor financial health. The good news – this group can find it easier to get back in good financial health because income levels are typically higher and some equity/net worth has been built up.

Not sure what kind of debt you have, or even if you are on the right track. Get started by taking the Financial Fitness tests, just click here. Then come in and talk to us. We’ll show you how to get in better financial health and get the debt load off your back.