A closer look at good debt vs. bad debt

It can be easy to get caught up in the whirlwind of your financial obligations. Between the mortgage, renovations, home décor, the kids, the car and healthcare, the list can feel endless! These days, when debt is virtually unavoidable, it isn't always easy to develop good reflexes or know if you're on the right track.

Updated on July 6, 2020

Two specialists have delved deeper into sound and less-than-sound practices when it comes to spending habits.

Let’s start with the good news: there’s no reason to be scared of debt. Despite the worst-case scenarios you might see on the news, the reality is often more positive. Just look at the real estate sector, where growth remains constant, or at interest rates, which are relatively low.

Appearances versus reality

That said, “People have a tendency to live beyond their means. When asked to fill out a budget worksheet with their income, expenses and debts, they quickly realize that,” notes Hélène Hétu, a budget advisor at the Association coopérative d’économie familiale (ACEF) de la Rive-Sud de Montréal.

Since it’s relatively easy to get credit, the allure of appearances often wins out. “The key is to shift our focus from what we want to do to what we can do,” she advises.

Is there such a thing as good debt?

Absolutely. “Good debt is linked to an asset, such as a house, a cottage or an RRSP. It’s perfectly normal to go into debt to buy a house, but less so to use your line of credit to go out on Friday nights,” explains Angela Iermieri, Financial Planner at Desjardins.

Hélène Hétu added that “when you take into account the resale value of a house, the debt can even become an investment.”

Real estate: Is it better to buy or rent?

This is a common question. Depending on your age, needs, capacity for a down payment and interest in being a homeowner, it may be wiser to invest similar amounts in RRSPs and TFSAs. To test your ability to keep up with the payments, it’s advisable to spend 12 months living like a homeowner, factoring in the mortgage, taxes, down payment and start-up costs (e.g., inspection, notary, mover) to see if and how your plan holds up.

Congratulations on your mortgage, but beware

Even if you’re approved for the mortgage amount you wanted - This link will open in a new window., it doesn’t mean you should take the maximum. That amount is an indicator. The point isn’t to live solely to pay off your mortgage, just the opposite, in fact.

Time to cut up your cards?

Hélène Hétu is surprised by the number of credit cards per user: “On average, people have three, four or five cards, as well as credit products and lines of credit. We need to be careful not to consider credit as extra income. It’s debt!”

Debt and separation

A separation inevitably leads to financial stress and, often, a decreased standard of living. It’s important to set your emotions aside to get a clear picture of your situation as a couple, which includes: your incomes, expenses, assets, shared debt (credit cards, personal, car and mortgage loans), insurance (e.g., life, health) and wills. Examine everything and provide details, including who the co-signer is.

Liquidating or redeeming assets, such as your car or house, combined with consolidating your debt through a financial advisor will help you get through this period more smoothly.

Hélène channels Pierre-Yves

Too often, buying products on credit and with interest is a sure-fire way to build up bad debt. Guru Pierre-Yves McSween’s mantra is, “Do you really need it?” But Hélène Hétu thinks you should also ask yourself: “How much can you afford to pay for it?”

Better safe than sorry

For the travel aficionados out there: “It’s smarter to set money aside before a trip rather than pay down the credit debt when you get back,” advises Hélène Hétu. Not only will you feel freer, but the trip will actually cost you less. The Savings goals tool - This link will open in a new window. is specifically designed for this purpose.

Savings strategies

She also recommends thinking about building savings as a challenge, a game that can be both stimulating and motivating. The medium- and long-term benefits generally lead to greater happiness than the fleeting pleasure of buying something new.

Start building your rainy day fund today

Don’t wait for life to throw you a curveball to take action. Angela Iermieri suggests “small automatic deposits into a dedicated account” to create a financial cushion that could cover three months of recurring payments. She points out that a line of credit is not an emergency fund(!), but rather a strategy for borrowing money that eventually must be repaid.

To help you live within your means, Hélène Hétu recommends setting 10% aside to keep you on track: “If you earn $1,000 every two weeks, pretend $100 of it doesn’t exist.”

How to settle your debts

Seeing your personal finance advisor is a good start. Organizations such as ACEF also help consumers get a handle on their finances. There are more than 40 such organizations - This link will open in a new window. in Quebec.

There is clearly no perfect solution, as the circumstances and ups and downs each person faces are unique. At a time when consumerism is becoming a hobby, it’s crucial to remember that we all have room to improve our financial habits. Now!

Hélène Hétu’s tips for avoiding debt

  • Buy used clothing;
  • Renegotiate your Internet, cable and phone bills;
  • Take advantage of free activities in the community;
  • Opt to live in a coop;
  • See a discount eye care provider;
  • Leave your credit card at home.

Test your debt knowledge here! - This link will open in a new window.

Recommended for you