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Some Debts Can’t Be Avoided. Here’s How To Keep Debt To A Minimum

There’s been a lot of attention in the media about the high level of consumer debt Canadians are indulging in compared to their disposable income.

Easy access to inexpensive credit and little stigma attached to being in debt, as well as the pressure felt to keep up with society’s image of success makes overconsumption a growing problem when people spend a lot more than they are earning.

Nevertheless, while this is true for many, the fact is it is difficult to pass through adulthood without being in some form of debt at some point.

Some debts can't be avoided. How to keep debt to a minimum

Here are 5 types of debt most people come across at some time in their lives:

1. Car Loan

You could save a lot of money if you bought a car with cash. However, very few people can. Car loans are the traditional way to finance a vehicle, and car dealerships offer cash discounts and financing deals to entice new car buyers.

Long-term car loans (up to 84 months) are becoming more and more popular.

Don’t be taken in by the low interest rate offered and the low payments (often stated as weekly or bi-weekly). Check the financing document to see exactly how much you are paying.

While a car loan has an asset attached to it, that asset is depreciating.

2. Credit Cards

Credit cards are a necessary part of how our world functions today and people use them for a variety of reasons. They provide a certain amount of convenience and can be a beneficial financial tool when used properly.

Where most people’s financial problems begin is when they acquire purchases that they can’t cover by the due date. If you can’t pay off credit card balances monthly, it means you don’t have the money for the purchases you’ve made. Period.

The quickest way to get out of existing credit card debt is to stop creating new debt.

3. Mortgage Debt

There are very few people who can buy a house without taking out a mortgage. You may be approved for a mortgage amount that’s way more than you had anticipated. It’s great that you have a good down payment, but don’t start looking in those high-end neighbourhoods yet. Never pay more than you should just because someone says you can afford it.

Keep your mortgage debt reasonable. Think about how long you will be making payments on your mortgage – it could be up to twenty-five years. What could you be using that money for instead during all that time?

4. Student Loans

About 60% of students take on some student loan debt – it may be difficult to pay for your education without it.

The average student who borrows money expects to graduate with about $27,000 in debt according to a 2015 survey by the Canadian University Survey Consortium.

If you are earning a diploma on borrowed funds, make sure the degree you’re getting has a good chance of providing you with a salary that’s big enough to repay your loan.

A few years in university can drag down your finances for a decade. That burden can often delay major life events such as getting married and buying a house, or even taking a vacation.

5. Wedding debt

Weddings have started to involve bigger numbers as expenses continue to add up.

According to “weddingbells,” the total expected average cost of a wedding is $30,717 (in 2015), including engagement ring and honeymoon, and 75% of brides agree that they will likely spend more than they anticipated.

I’m not suggesting you forego the wedding of your dreams, but that is some serious money for a one-time event.

Final thoughts

You hear all the time that some debt such as mortgages and student loans are “good” debt. There may be times throughout your life when it may be hard to avoid incurring some debt in order to make progress on your financial plans and attain your goals, but that doesn’t make it good. It’s still debt, and your objective should always be to have as little debt as possible.

Falsely terming something as “good” makes people too comfortable with thinking that debt is somehow okay.

Keep debt to a minimum, and always have a plan to pay it off as quickly as possible. The best debts are the ones you don’t owe anymore.

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7 Comments

  1. Jaymee @ Smart Woman on October 27, 2016 at 3:08 pm

    I don’t understand why anyone could think that taking a car loan out for 84 months is a good idea.

    • Beth on October 28, 2016 at 5:25 am

      Because people see the monthly payment and think “I can afford that”.

      When I replaced my old car, most salespeople tried to get me to focus on the monthly payment, not the total purchase price or total cost of ownership. In my experience, if you’re smart about those bigger questions then the monthly payment should be affordable anyway.

    • andrew c. on October 29, 2016 at 1:04 pm

      If the dealer is offering an interest free loan or very low rate, it can make a lot of sense, particularly if you could pay cash or a large down payment in any event. I bought a car (that I still have) eight years ago on which the dealer provided interest free financing for 60 months. I could have paid cash but that made no sense under the circumstances. Eight year loans are a problem when the buyer buys a lot more car than he/she can really afford and when he/she is likely to want to trade the car in before the loan is paid off.

      • Geoff V on October 30, 2016 at 9:10 am

        Andrew, I agree. We bought a new car with 0% interest for 84 months with intention of driving it 10+ years (we drove our last car 13 years). Its the only debt that we have so easier to absorb. But its not for everyone.

      • Diane on January 2, 2017 at 5:26 pm

        In most cases where there is an incentive in the form of a reduced or 0% interest being offered by the auto manufacturer, there is also a cash incentive offered if you choose not to finance. If you look at the finance contract the amount of the cash incentive should be showing as a cost of financing the vehicle. Usually, if you can pay cash you are better off with the cash incentive than the reduced interest rate.

  2. Kate on October 31, 2016 at 12:36 pm

    Yeesh, wedding debt freaks me out. Starting out married life in debt just seems like such an unnecessary stress that is so easily avoidable!

  3. Jacob Merkley on November 1, 2016 at 10:56 am

    I completely agree with your assessment. ALL debt, even “good” debt like student loans or a mortgage, can have the same effect. ALL debt can ruin financial dreams, or stifle financial dreams (if you let it).

    I don’t like that the financial world has deemed different debts as good or bad. By doing so, people are led into a false sense of security that having “good” debt is OK. It may be OK, but it will never make it “good”.

    When my wife and I were wanting to get rid of our debts, we created a Debt Destruction Plan. We made sure that we categorized all of our debt as “bad” and not good. This helped us create the list that we would then snowball down. I am glad that we got organized. It made all the different for us.

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