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Are You Broke or Broken?

September 5, 2017

There is a difference but being broke can break some people’s spirits.

It is important to separate out, in your mind, the difference between having no money and having no future. Unfortunately for some people their lives are so tied to being in debt that they feel like failures when they are not in debt – at least that appears to be the paradox.

During the past three to four decades we have become habituated to using debt as if it were income. The use of debt has been economically corrosive in a very big way – debt has contributed to lower incomes and reduced standards of living and weakened retirement expectations.

Many Canadians struggle with savings, more and more people withdrawing savings from RSPs, whole life insurance policies and TFSAs to use the funds to repay debts. The process of self liquidation eroding, piece by piece, one’s ability to prepare for the future contributes to the feeling of failure.

Too often credit is used as a bridge between the lifestyle we are told we can and should have and the lifestyle we can truly afford. $300,000+ mortgages are quite unrealistic for more than 50% of Canadian income earners, Statistics Canada reports that 40% of Canadians have less that $25,000 per year in gross income.

Even if two people, each earning $25,000 per year, are contributing to the home mortgage CMHC says they would only be able to use up to 32% of their gross income for debt management. Ironically this value hasn’t changed in 100 years although taxes have more than doubled during that time frame. Nonetheless, 32% of $50,000 is $16,000 or about $1,300 per month. That means that you can use up to $1,300 to manage all your debts – credit cards, car loans, furniture purchases, student loans and mortgage payments.

You may feel beaten up by financial institutions but you shouldn’t feel broken down by them – there is a better way. Talk with a Licensed Insolvency Trustee about resolving debt problems before you liquidate assets that are exempt from seizure and develop better money management skills.