Canadians have a big problem with debt and it’s only expected to get worse as our indebtedness continues to rise higher and faster than our incomes. Last December, the Canadian Mortgage and Housing Corporation (CMHC) reported that our household debt to disposable income (DTI) sits at about 170 percent nationally—that’s an uncomfortably high figure. Put simply: the higher the DTI percentage, the more money crunched you’ll be and the harder it will be to secure loans or lines of credit.
Canadians are already finding it difficult to keep their heads above water. The latest quarterly MNP Consumer Debt Index, which surveyed 2,154 Canadians, found that 46 percent of us are $200 or less away from insolvency. Should interest rates rise, many Canadians would struggle to make payments the CMHC says.
“Getting in debt has become so easy that we’re numb to it,” Melissa Leong, Canadian author of Happy Go Money, says. “With debt being so readily available and cheap to carry, we mostly shrug and nod when it comes to borrowing.”
It’s tough to crawl out of that hole—I’ve been trying for the past year, since I realized just how much debt I’d accumulated. (A quick conversation with a financial expert was my much-needed wake-up call.) I wish I had only known and recognized these warning signs much earlier on. Here’s what to watch out for.
You’re constantly stressed about money
Financial stress can affect your mental health and well-being, especially if it’s been a long-term struggle. One big indicator is losing sleep. According to a 2018 survey of more than 1,100 Canadians by the Financial Planning Standards Council, almost half (48 percent) say they’ve lost sleep because of financial anguish.
If that’s you, take that as a sign you’re not in a good place financially, says Kelley Keehn, author of A Canadian’s Guide to Money Smart Living. “The stress starts to affect your cognitive capacity for everything— from being a parent, student or employee,” Keehn says. “With creditors calling, it’s going to start to spill out onto every aspect of your life.”
This is where you’ll have to swallow your pride and ask for professional financial help. That second pair of eyes can help you come up with new solutions and help alleviate some of that pressure.
You’re only making minimum payments
If you’re only paying the minimum amount on your bills, it could take decades to pay off just one item, Keehn says. For instance, paying the minimum monthly payment on a credit card balance of $1,000 with an 18 percent interest rate will take 10 years to clear. (Not only that, but you’ll have paid close to $800 extra in interest.) You can calculate how long it will take to pay down your credit card, with this credit card payment calculator.
If you find yourself in this situation, it’s important to prioritize your debts, Leong says. First, cover the minimum payments of each of your debts and then allocate all your free funds to the debt with the highest interest rate. Once that one debt is cleared, roll the payment and the money you were using to service that debt into the next balance. (In the meantime, though, try not to make any new major purchases.)
You’ve maxed out your credit cards
Stop whatever bad habit it is that leads you to max out on your cards. That means no more emotional spending or buying compulsively, Leong says. “Don’t think because you’re buying something on sale that you’re saving money, because you’re not. Remember that you can’t fix debt with debt,” she says.
I found it helped to unsubscribe from store newsletters and promotions, and I unfollowed Instagram accounts that promote shopping. It can also help to delete your credit card information from your computer browser and stay away from malls.
“Know your triggers,” Leong says. “If you have a habit of buying things after a hard day at work, schedule your workout or a walk with a friend at the end of the day to defuse stress.”
You’re spending too much money on your debts
Leong suggests following the “50/30/20” rule. This means 50 percent of your income is ear-marked for your spending on needs, 30 percent toward wants and 20 percent toward savings and debt repayment. (This is just a rough guide—living in a big city with higher housing costs, for instance, might mean you have to spend more on your needs.)
And if funds are tight, you might have to funnel every bit of money—birthday money and tax refunds, for example—into bill payments. Consider a side hustle to gain extra cash and find ways to cut expenses, Leong adds.
You’re dipping into your savings
Taking money out of your savings to pay bills should be avoided at all costs, Keehn says. “If you’re dipping into your RRSPs, you will be taxed on that, too,” she explains. And if you think taking equity from your home might be a better alternative, think again. Taking it out for a vacation or renovating your home, for example, may eat up your ability to achieve your future financial goals. Instead, you’ll have to do some major cutting back financially and only spend what’s in your pocket—no matter how hard that may be.
You pick and choose the bills you pay
Doing this will keep your creditors at bay for only a short period of time, Leong says. Instead, call your credit card company and ask for a lower interest rate.
Also, try consolidating your debts into one monthly payment through a reputable non-profit credit counselling organization. This service also comes with education on how to manage your money. Just be careful of transfer fees and limitations (always read the fine print).
A year ago, I had checked off every one of these signs. With the help of a financial advisor I was able to make those necessary changes to my money habits. Before I knew it, I had paid off—and gotten rid of—two credit cards and one line of credit.