Debt | PF Weekly Grab a Brew

Is there such a thing as healthy debt? :PF Grab a Brew #79

grab-a-brew-healthy debtWHAT DEBT MEAN TO YOU

 

When does owing money become healthy debt or unhealthy debt? When will you be debt free? Can you handle having debt? What does handling debt mean? These questions and many more can only be answered by… you!

I was reading a recent article on Yahoo about how Canadians are potentially facing debt fatigue which keep people on the beaten debt path. It’s not surprising though with the amount of people who are swimming in debt with nowhere to go.

What I found interesting was that maybe many Canadians find having debt less of an issue because interest rates are so low. Really? Is that how you feel? I would hope that we as Canadians take that as a warning as well as a blessing to make sure that we are money ready just in case some twist of financial fate comes our way.

I’m a planner so when we started using our budget spreadsheet it was a relief knowing that we were spending less than we earned with some room for movement just in case.

 

When will you be debt free?

 

A recent poll by CIBC suggests that age 53 is when most Canadians hope to be debt free which is down from age 56 in 2011. What was interesting when I read the stats was the current debt for those aged 55-64 are lines of credit (40%), mortgages (32%), credit cards (29%) and car loans (25%).

I agree with Kristina Kramer, Executive Vice President, Retail and Business Banking of CIBC with what she says about Canadians “unless they have a solid financial plan in place they may still find themselves with significant debt obligations as they near retirement.”  Hoping your finances will fall into place as you near retirement is not good enough. You must set goals and have a plan.

We all face challenges in our life at some point and for the most part we’ve created a small percentage of these pitfalls we must climb, debt included. No matter how you managed to secure debt in your name you still need to find a way to pay it back. Debt fatigue as I mention above is when someone is in debt and simply can’t pay it back so they do the natural thing, they give up.

Yes, that’s right they give up and they keep finding ways to create more debt by applying for more credit cards until the lenders feel you are over-extended or are faced with none other than bankruptcy or other means to get that debt lowered or to diminish it. Not fun especially if you wait until the end to seek help. It doesn’t have to be that way.

Know the warning signs that your debt is causing you serious financial issues and jump on it before you have to make decisions you’d rather not. Start with a budget, track your expenses and live with-in your means. It really is that simple.

If you aren’t the budget type a spending journal will work just as well but it’s more about knowing how much money you net and how much you are spending. It’s a financial awareness and without it you are playing a guessing game with your financial health and future.

Don’t let low-interest rates fool you into thinking you have more money to spend than you actually do either, do the math. Find out just how much that debt will cost you in the end and think about what would happen IF interest rates went up. Could you handle it financially?

 

Healthy debt or unhealthy debt

 

That type of debt above is scary for many people but for others debt may take on a different role, especially when that debt is making them money. You have to spend money to make money as the saying goes. I had a fan email me a few weeks back wanting me to talk about why having debt could be a good thing rather than always being labelled as bad.

I don’t disagree that debt could be a good thing BUT only if you have the money to back that debt. Not everyone wakes up in the morning smiling that they have debt. Most people don’t associate debt with being good nor do they get excited chatting about how much debt they hold. You don’t hear that, you hear about people excited that they are debt free with no financial worries.

Is there good debt?

The word good and healthy when it comes to money means the same thing to me. I guess that all depends on how you view debt. Some say an education debt is a healthy debt to have in your back pocket where I say if you have no career after you spent $60,000 in University how healthy is that debt then?

Debt is debt… you owe money and although you are investing in yourself if nothing comes of it then you are back at square one. Again… risk! Just know what you are getting yourself into and don’t be fooled that it will go away fast either. If you have OSAP loans it takes time to pay them back depending on how much you can afford to put down on your school debt.

The people who have debt and are investing money to make money might be the one’s smiling, but again with any debt comes risk. Education is investing money, just in yourself.

Just because you see trends or listen to what the experts say “might” happen with the markets (including job markets), real estate and other investments doesn’t mean you are in a safe place with your debt. In an instant everything can go south and you have more debt that you can handle and no money to pull yourself out.

I know that everyone has their own ideals when it comes to having debt and whether it’s healthy debt or not but I believe it’s personal. We can’t go around judging what people do because we don’t know what they have and don’t have. Frankly, I don’t care. What I do care about is our finances and sharing what we did. It’s up to you how you plan your financial future. I can’t hold your hand, no one will.

Lots of financial feelings if you may are personal. You might find someone is happy as a horse with $100,000 debt and causing him/her no stress and they don’t mind paying interest on their debt. All they care about is living day by day and enjoying life and hoping that where the debt sits that it either works out or creates more wealth for them.

On the flip side you might have someone like my friend Tony who had $100,000 worth of debt and that really bothered him and put a dent in the family finances. He clearly did not think he had healthy debt and quickly worked out a financial plan to get out and sounds pretty happy to me these days.

 

Paying off the mortgage

 

Some fans have asked why we decided to pay off our mortgage so fast when the interest rates were so low? Good question, and the answer was so we could sleep at night. We didn’t ignore our retirement savings and everyday life to pay off our mortgage because we wanted to be debt free, rather we took a balanced approach to our finances.

We have zero debt now and are free to invest it how we wish without having to worry that we still have a mortgage and we lose the shirt off our backs because our investments tank. That doesn’t mean we don’t have bills to pay and money to come up with to maintain our home because we do.

Even if house prices sink we still have the roof over our heads and prices are relative no matter which way you look at it. At least to me it seems that way unless you owe more than what your house is worth which happened to many of our friends in the USA. I’m sure things would never get that bad in Canada but I’m sure they said the same thing in the USA. Never say never, right?

 

Holding debt for the right reasons

 

Others feel comfortable holding mortgage debt and investing every penny they’ve got in hopes of grand returns and that’s fine as well if they are happy with their debt to income ratio and financial savings.

I don’t know how healthy that is for them but if they can sleep at night with no worries then so be it. To be honest I think it’s great when someone has it all figured out. That’s not me as I’ll probably never figure it all out because I find circumstances always change (there is that risk again). Where the issues may creep up is if the financial road they envisioned doesn’t work out. How will they handle that emotionally and physically?

I think this is why many advisors ask how you feel about certain levels of investment strategies. If you can’t handle your money dipping and will go crazy you might not want to invest it in something that may be volatile in the markets. Then again that market might rise up and make you happier than you ever dreamed. In then end… it’s called “risk”.

Do you think there is such a thing as healthy debt? At what age to you plan to be debt free?

 

Top recipe

lemon basil pasta salad

If you don’t already know I have a second Facebook page called The Free Recipe Depot where I share recipes from other Foodie Bloggers from around the world.

Once a week I pick one recipe that has been submitted as my Top Recipe of the week. Trust me when I say this is no easy task as some of these foodies can cook up a storm.

This week I picked a summer salad for all of you that love to eat salads during the hot weather. Check out this Lemon Basil Pasta Salad made from the foodie blog An Affair of the Heart. I love everything to do with basil and this year our basil is growing faster than ever. Enjoy!!

 

Weekly CBB posts

 

If you missed any CBB posts from the week here is the list of posts you can catch up on reading!

Happy 4th of July to all of my American readers!

 

Editor’s Pick

 

Every week I will pick a blog post of the week from around the web that I found interesting and want to share with you and an Editor’s top blog post pick.

 

Editor’s blog post pick of the week

There comes a point in our life where experiences mean more than having things and I agree. I’d rather have the small house and live a comfortable life doing what I love which is exploring the world. I’d rather spend time with friends and family over collecting toys I don’t need or might not ever use. Time is precious I agree.  A good read!!

 

Blog post I enjoyed

 

Well, that’s a wrap for this PF Friday’s Grab a brew #79. Happy budgeting and I’ll see you here again next week when I do it all over again.

~Mr.CBB

 

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17 Comments

  1. Debt is always bad and I remembered when I had around $16000 of student debt it was a tough time. I was unable to sleep peacefully due to debt, then I made a plan to pay off my debt. I started working extra on weekends to generate income which eventually helped in paying off my debt. It was tough, but now I feel much better and relaxed.

    1. I hear ya! Debt is debt no matter what way we look at it. Sure it may get us ahead BUT we still need to pay it back and if that’s not possible that debt becomes and even worse threat to our finances. Thanks for your comment John Mr.CBB 🙂

  2. I think having a mortgage is a good debt to have. For myself, personally, I find that my credit card debts and student loan debts are the unhealthy debts. If I had a mortgage, I wouldn’t necessarily consider that falling under the bad debt category.

    1. What I’ve learned is that it all boils down to personal opinion on this topic. When we had no debt but the mortgage the mortgage had to go. I personally think having any debt is bad debt because it’s something you don’t own because someone gave you the money to buy it. I know the bad debt police might not come after someone but it’s a personal outlook. I’d rather owe nothing than having debt loom over us. Thanks for dropping by Michelle 🙂

  3. The only debt I’ve ever acquired was $16.5k for college but I paid it off as soon as it started to add interest. So, I’ve really never had debt. I hate the feeling although I may use it to buy my first home. We’ll see.

  4. I think it’s a very loaded question. I don’t think either education or mortgage are inherently bad. Or even a car loan necessarily. Lets say you have a job that requires a car..well if you didn’t have that car then you couldn’t get to your job. Yes that’s a pretty broad generalization. Now if I bought a 25k or more car brand new to get to that job…well that’s dumb…but it I bought just enough car that is safe and reliable with a very low interest rate, then I’m more comfortable with that. I don’t like owing anyone…period, but sometimes it does feel somewhat necessary. You just try to minimize the damage.

    1. Like I mentioned it’s all personal and we base it on our personal situations, like you are. In terms of debt it’s debt to me no matter what way you look at it. You could lose your job tomorrow and you would still be responsible for that car, mortgage, student loan. Yes, you may need it to get ahead but holding on to debt longer than we need to might not be optimal unless that debt has a return on investment or is making you money. 🙂 Have a great weekend Tonya. Thanks for coming around.

  5. My in-laws just got approved by their mortgage loan, they purchased a condo because they would like it to be a rental property. And maybe, I think that is a healthy debt, they can make money from it every month, they just need to find a good tenants.

  6. Years ago we borrowed to get RRSP’s but those loans had to be paid back by income tax time the next year so hubby could borrow more for more RRSP’s. There were days it drove me batty because paying those off meant that we had to be so careful with everything else. Mind you those were the RRSP’s we had to cash in after hubby fell off the roof in 2009 so they did save our butts but it was still rough going to get them paid back in time.
    We still have the mortgage but the interest rate is low on that.So long as interest rates stay low it won’t be so bad but we all know they will go back up at some unknown point in time. I think people have forgotten that fact….rates can and will go up again eventually. When that happens it won’t be pretty. I remember the early 1980’s and those high interest rates.
    Hubby never had too much trouble taking on debt but it tends to bother me. Any time I said something he would kindly inform me that he knew what he was doing. Famous last words.Since he became unwell a lot of the load has fallen my way and he is starting to realize I had reason to complain about these things. Nothing we can do about past mistakes now. The debt now is the mortgage and some on the redi-line but we are trying to get things paid as best we can.

  7. “We didn’t ignore our retirement savings and everyday life to pay off our mortgage because we wanted to be debt free, rather we took a balanced approach to our finances.”

    I think that is key! A balanced approach is the best approach when it comes to most things in life!

    1. Thanks Kirby. One comment on Twitter made sense too… it’s not only about risk… it’s about ROI. That I’m afraid comes with risk though. Doesn’t everything?

  8. I am more comfortable with debt than hubby is but perhaps that is because I am the one that manages our funds and I am well aware what liquidity we have in the event of an emergency. I never put us in the position of using debt without the ability to pay it in full, without a twinge, should I need to.

    We currently hold two forms of debt… the credit cards that we use for all of our purchases, in order to earn rewards, but that are paid in full absolutely every month simply because we do not spend beyond the cash we have available in the chequing account in ADVANCE of our spending and we also owe about $10,000 on the line of credit for a timeshare purchase we did back in April. That debt will be gone by the end of the year. We could retire the debt easily today but I know myself… I will NEVER shirk a debt but I have been known to decrease a savings payment if I want something. Yes, my wants can and have gotten in the way of my savings patterns in my youth. I have learned my lesson… funds that are saved, are permanently saved and are never to be touched barring the most dire of emergencies. I feel comfortable paying a small amount of interest for the privilege of increasing our timeshare ownership 6 months before we would have if I had gone “cash in hand” to pay for it. To my… $200-300 in interest is worth it to have an extra week of pre-paid travel this year. I sure couldn’t get a week’s stay for $300 – that doesn’t even cover one night at the 5 star property we purchased!

    As I said though… I am okay with the current debt load but hubby sleeps better without any debt so before we incur a debt I discuss it with him and we make a joint decision as to whether to proceed or not, I show him the repayment plan I have developed within our budget and the guaranteed last possible debt retirement date… all before we take on a new debt. He knows we have the money to pay it off before we ever take it on and he also knows that all debt will be zero on our Dec 31st financial statement. I don’t carry debt from one year to the next. Every time I make a lump sum payment to reduce the debt, I advise him how much we paid down and the new debt balance so that he can see the debt is reducing according to the schedule we agreed upon.

    1. You both seem very prepared with your finances and as long as you can sleep at night and you know where you are headed than that is what works for you. It’s great when I hear stories from fans who have goals set and a financial plan in place because I know they are aware of their finances.

  9. I just think everyone is concentrating on growing wealth by getting rid of debt. That will get you far but I feel if you borrow to invest at the end of the day you’d be better off. Have a good weekend

    1. As long as the person investing knows what they are doing to right? Could go either way. I remember a guy who borrowed money to invest in a business but the business tanked and he had no money to back him up. He owed money for a long time. Investing is great as long as you find things to invest in that work in your favour like you mentioned earlier. Cheers mate

  10. I agree with holding good debt. Good debt in my opinion is debt that makes you money and there is some sort of tax benefit involved. You are correct in saying it’s up to each individual and how much risk they want to take. However, outside of the stock market there are some very good ways to invest that will get you returns of 15%. Currently most credit lines are prime plus 1/2% which is 3.5%….the interest your making pays the interest your paying out. The net affect is your making money with someone else’s money and using that money to pay down your mortgage. I understand in your situation you could just invest your available cash and make a higher net return. But your returns could be even higher using someone else’s cash.

    1. Thanks for the feedback Tony. I always enjoy reading what other people have to say because we might all just learn something new. Have a great weekend.

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