A Guide To Understanding Your Debt
For some people, the idea of having any debt that isn’t absolutely necessary will seem like too much.
Everyone has their own idea of what is sensible to borrow, and some people don’t have the same resources as everyone, making it hard to figure out what is acceptable when you’re borrowing money.
Of course, though, there will come a point when you reach the true limit of your debts, and you will begin to struggle to pay them off if you go too much further.
It’s not always easy to figure this out, and many people find themselves letting loans accumulate without realizing quite how much they owe.
So how much is too much debt?
Let’s find out.
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Your Total Debt Servicing Ratio (TDSR)
As you might expect, banks tend to have a very good understanding of money.
They know what is affordable, and many financial organizations invest a lot of money into working out how much it is safe to lend to their customers.
This is represented by a figure known as your total debt servicing ratio.
Your TDSR can be worked out by adding up your credit card, mortgage, loan, and other repayments each month.
Once you have this figure, you should compare it with your income, with the ideal number being less than 40% of what you’re earning.
It can be very difficult to get a loan when you have a TDSR that exceeds 40%.
Some payday and other high-interest loans will be available with a higher TDSR, though they usually won’t be worth the risk.
Your Gross Debt Servicing Ratio (GDSR)
Your gross debt servicing ratio is used to work out whether or not you can afford a mortgage, and shouldn’t exceed 32% of your monthly income.
Lenders will use this when they check your finances before buying a house, and it’s worth making sure that you won’t exceed this limit if you’re going to get a good mortgage that won’t cost a small fortune.
This factors in the cost of the mortgage, your gas and electricity costs, and estimated maintenance fees that you might have to pay.
It can be hard to work this out for yourself, but Bankruptcy Canada can help you with this.
With more than 20 years of experience working to secure mortgages, we understand what it takes to get this type of loan.
Your Realistic Debt Limit
Alongside the debt limits that the bank imposes, it’s also worth thinking about the limit that your budget puts in place.
Everyone has different commitments and financial needs, and this means that the bank’s estimate could be wildly incorrect in your circumstances, making it crucial that you stop yourself before you borrow too much.
There are a number of factors that go into your debt affordability.
Those with children will almost certainly have more essential outgoings than those who don’t, while anyone who owns a car will be spending more than people who choose to walk or get the bus.
You have to make sure that you’ve factored all of this is when you’re deciding whether or not you can afford another loan.
Do You Have Too Much Debt?
Figuring out whether or not you’ve got too much debt can be a tricky process.
Your finances might not be the same each month, making it difficult to predict whether or not you can afford to pay them.
Even if it’s hard to work out, though, it’s crucial that you know how much you’re spending on your debt in relation to your income.
To start working this out, you first need to think about the money you spend on your life’s essentials.
Rent or mortgage payments will take a large chunk of your income, while utilities, food, and transport costs will also add up.
It can be a good idea to set yourself a monthly saving goal as you do this, even if you won’t be able to achieve it until you’ve paid your debts.
Once you have your spending ironed out, it will be time to take this away from the money you earn, along with the money you have to spend to pay back your debt.
An Example Of Too Much Debt
You are earning $3000 each month, providing you with a good income and enough to support a growing household.
You’ve recently bought a home for your family, and this is costing you $800 each month in the form of a mortgage that will take 35 years to pay off.
This leaves you with $2200 of your salary.
Buying food, school supplies, and everything else you need for your family typically costs you around $500 each month, while your bills for electricity, gas, and broadband work out at about $250 each month.
This leaves you with $1450 of your salary left over.
Alongside your essential spending, you will probably spend at least $300 on luxuries each month, and saving up for college tuition for your two children will cost $200 per month, leaving you with $950 of your salary.
Out of this, $500 each month would be a nice saving goal, and this seems perfectly manageable.
Of course, though, we’ve only covered mortgage debt, and this leaves your credit cards, overdrafts, and other debt to think about.
With the costs of bringing two children into the world, you’ve mounted heavy credit card debt across three different cards, forcing you to spend $400 each month.
Your $3000 overdraft will take more than a year to pay back if you’re only putting $200 towards it each month.
Paying for this level of debt would cost leave you with just $350 out of your salary each month, making it impossible to meet your saving goal.
Some people find themselves in a much worse position than this, but this shows just how easy it can be to fall into the trap of thinking you can afford more debt.
Getting Debt Help From Bankruptcy Canada
Bankruptcy Canada has spent more than 20 years working with personal debt problems.
We offer confidential and obligation-free advice, making it incredibly easy to get the advice you need when you’re struggling with something like this.
You can email our team at Gordon@BankruptcyCanada.com or call 1-877-879-4770, and we’ll be more than happy to see what we can do.
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