Managing Finances in Canada

Managing Debt Wisely

It can be expensive to live in Canada. Very few people have enough cash on hand to pay for major purchases, like a car, a house or a university education. Yet these can be necessary items.

To pay for them, people typically borrow from a bank or other financial institution. Used this way, debt is a valuable tool. But if you borrow too much or for things you don’t really need, debt can work against you.

The following information will help you manage your debt wisely.

Good Debt

If you’re borrowing money to purchase something that will be worth more in the future or to pay for something that you really need, then debt is considered good to have.

• Mortgages — Borrowing to buy a home (taking out a mortgage) qualifies as good debt in two ways: It’s a necessity (everyone needs a place to live); and its value is likely to go up over time.
• Student/education loans — Upgrading your skills or education could help you get a better job that pays more, especially if you choose a high-demand field. Most universities and colleges have career counselors on staff who can help you explore the opportunities in particular fields. Be sure to ask about any grants or bursaries for which you might be eligible, because they will reduce the amount of money you need to borrow.
• Registered Retirement Savings Plan (RRSP) loans — To maximize your RRSP, you may choose to borrow to top-up your RRSP contribution. An RRSP is a special type of banking or investment account designed to help Canadians set aside funds for when they retire. Contributions are tax-deductible and there is no tax charged on the earnings within the plan until they’re taken out.
• Car loans — Depending on where you live, you may need a car to commute to work or keep your family mobile. In this sense, a car loan can be classified as good debt.
• Home improvement loans — Upgrading parts of your home or making repairs may help your family live more comfortably and may also increase your home’s value. Do your homework, though, and ask yourself if your improvement will really be helpful.

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Other Debt

Debt can work against you if you borrow in order to pay for something you don’t need or items that are only going to lose value over time. Most of this type of debt usually lands on your monthly credit card bill.

Credit cards are useful and important to have, but be careful not to use them for impulse purchases or to buy more than you can really afford. For example, you may need to purchase a new TV, but is it worth paying interest on it for the next year? A better option may be to save up for luxury items and pay for them in full when you purchase them. That way, you’ll avoid paying interest altogether.

Now that you have a sense of the different types of debt, look at your own situation. Which category do your current debts belong to? If any of them are working against you, paying them down as much as possible should be one of your first priorities.

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