An RBC survey showed that average non-mortgage debt has increased again this past year by an average of 21% or almost $2,800 for a total consumer debt load of nearly $16,000.

Some reasons are given, such as lagging job growth and incomes only rising moderately, but the actuality is that people are still spending beyond their means!

Related: What’s busting your budget?

Very few people earn enough to pay cash for life’s important purchases – home, car, university education – which makes debt unavoidable, but attitudes have to change.

Good debt vs bad debt

Any discussion about debt will revolve around whether it is good debt or bad debt.

Good debt – an investment that will grow in value or generate long-term income, e.g. mortgage, student loan, business loan.

Bad debt – used to purchase things that quickly lose their value and carries a high interest rate, e.g. credit card, pay day loan.

Most people would agree that carrying a high balance every month on a credit card at upwards of 20% interest is not financially prudent, but “good” debt can quickly turn into “bad” debt if not managed carefully.

Related: Why our debt-to-income ratio is misleading

Let’s look at two ways that this could happen – mortgage debt and student loans.

Mortgage debt

Owning your own home is a goal of most families (and singles, too) but would be impossible without a mortgage.  Low payments from today’s rock-bottom interest rates make it achievable, and a home is an appreciating financial asset that increases in market value over time.

How can this be “bad”?

At one time people bought a “starter home” for their first house.  Over a few years, as family needs and finances changed, this house was sold and the equity (read larger down payment) used to buy a larger home.  This is no longer the case.

Many first-time buyers are jumping right into the larger “dream home.”  They allow their mortgage lender to determine how much they should borrow and their real estate agent to talk them into buying the most house they can qualify for.

Related: How much house can I afford?

They allow the home builders to add unnecessary upgrades that will eventually cost 3-4 times the price of something that can be purchased later in a home improvement store (on sale).

They choose the lowest down payment and the longest amortization possible, and then worry about what will happen when interest rates rise.

They buy at the top of the market and may lose a considerable amount of money should they have to sell in a market downturn.

Student loans

Many studies have shown that a university graduate can earn over $40,000 in annual income than someone who just completes high school.  Investing in yourself can have one of the highest pay-offs by increasing your value as a future employee.

RelatedWhen doing what you love doesn’t pay the bills

However, with full-time university tuition in Canada averaging $5,600 a year, plus additional compulsory fees, books and living expenses bringing the total up to $15,000 a year or more, a student needs to study the right subjects.

One of the problems facing graduates is that they are often shocked to find out that they have spent four years learning about subjects that no one but themselves really cares about.  A majority find themselves working outside their fields of study within two years of leaving school.

Students need to thoughtfully match their education and their desired career choices with their natural talents and abilities to increase the value of their contribution to a prospective employer in order to be a top earner.

The graduates I dealt with when I calculated their jaw-dropping monthly loan payments were not congratulating themselves on their sizable new salaries then.  They were worried about making those payments, even with low interest rates and available tax credits.

Related: How fast should you pay off your student loans?

And, what if the student doesn’t complete his or her studies?

Final thoughts on debt

It’s unrealistic to ban borrowing money from our lives – debt can’t be avoided – but we have to be smart about it.  So called “good” debt can turn into “bad” debt if we are not careful.

Buzzwords such as low interest rate, buy now/pay later, leverage, consolidate, payment vacation, tax deductible, and, yes, good debt, can mire us down into a situation that’s difficult to climb out of.

Related: Why a mortgage payment vacation is a bad idea

The RBC survey showed that 38% of respondents were very anxious about their debt.  Debt can tie a person to an undesirable career, squash opportunities and create heavy burdens.  What a way to live your life!

Debt of any kind should be seen as a short-term situation that always has an accompanying aggressive payment plan.  It should be a means to an end that leaves you better off in the long-term.

  • Borrow the least amount you can get by with by having realistic expectations and saving as much as possible yourself first.
  • Borrow only what you know you can easily repay.
  • Find the cheapest way of borrowing.
  • Clear the debt as quickly as you can.  Don’t stretch it out as far as possible.  This includes constantly transferring and consolidating.
  • Have an escape route in a worst-case scenario.

Related: How I plan to be financially free by 40

In my opinion, being debt-free is the ideal and the goal you should be reaching for.

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