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Hello All, According to Statistics Canada there was $1.73 in “credit market debt” for every dollar of household disposable income at the end of the second quarter of 2021,. Credit market debt refers to all types of debt and includes mortgages (the most significant portion ) and also lines of credit, credit card debt, car loans etc. This sounds like a significant number, but as with any metric, is not meaningful when taken in isolation. Other factors to take into consideration are the value of your assets, interest payable every month and any other tangible or intangible value that you might be receiving as a result of the debt. So what is good debt vs bad debt? Simply speaking good debt has the potential to increase your net worth either through the purchase of an appreciating asset or by potentially providing something that has future value. The most obvious example of good debt is real estate whether it is your home or an investment property. Since, typically real estate increases in value over time, a mortgage actually allows you to increase your net worth at a higher rate than if you were purchasing the property through savings (as long as you can make your monthly payments and interest rates are low). This has been the road taken by many millionaires and billionaires, many of whom have aggressively used debt to amass their fortunes. Another example of good debt are student loans. These might seem onerous at the time, however, higher education can lead to a significant increase in future earnings (although perhaps not all degrees are created equal). Becoming a doctor or a manager or a tradesperson might require an up front investment in education, but this is accompanied by salary expectations that are expected to grow at a higher rate. In economic terms the present value of future earnings (the amount that the total of your lifetime earnings are worth today) are higher for those with greater education or vocational training even after factoring in student loans. Similarly, starting or buying a business is another example of good debt since it has the potential to generate future value. Debt that is bad is pretty much any type of debt incurred to buy rapidly depreciating assets or stuff that has no long term value. The best example of bad debt relates to the purchase of cars. That brand new BMW 7 series might look amazing , but sadly plummets in value almost as soon as you drive it off the lot (and supposedly within 5 years it depreciates by 71%). Other examples of debt that are bad include most credit card debt that is used to buy consumables or experiences that also don’t have any tangible future value (except perhaps to a vintage collector on ebay). It has become very easy these days to acquire access to debt. Many of us have numerous credit cards while others have lines of credit attached to the value of their homes or investments. Immersed in a culture where we expect instant gratification, it takes a great deal of financial discipline to not go out and buy that seemingly perfect pair of shoes that you keep seeing on your Facebook feed or that dream vacation, all of which are always on sale for a limited time. This doesn’t mean that you shouldn’t go out and indulge in these types of rewards. It just means that you need to have some sense of the amounts you are spending, and ideally a budget or a goal that doesn’t involve treating your credit card like a bank account (interest rates on credit cards can exceed 20%). Ideally credit cards are paid in full every month unless there is an extenuating circumstance . So when deciding how to spend your hard earned money, taking on debt is fine as long as most of it is “good debt”. Of course, some might argue that the you can’t put a value on happiness that comes from spending money, but remember that the pain of paying it back could significantly outlast the pleasure that you derive.
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