Am I in debt? Understanding your financial health

2023-11-01  4 minute read

Alana Orrell

Lifestyle Debt

Financial Literacy Month: Part 1 of a 10-part blog series on your financial well-being

Throughout November, consult this series of blog posts to learn more about your current finances — and how to set yourself on a path to financial freedom.


With so many moving parts, it can be hard to understand your finances. You have to budget and track your spending — not to mention keep track of all the bills that automatically come out of your account each month. Financial wellness also requires staying on top of all your various account balances, their interest rates, monthly payments, and due dates.

These steps can be challenging to incorporate into a busy schedule, especially if you never received the formal training or practice to incorporate them into your daily/weekly/monthly to-do list.

So, who can blame you if you haven’t had a chance to review your credit report or check your credit score? Maybe you don’t even know where to find that information.

Thankfully, understanding your financial health is a lifelong process. You don’t have to figure it all out right now. And you don’t have to do it alone. Even better, you can make significant strides forward by simply coming to grips with one thing: your debt

What is debt?

Like most people, you probably have a working understanding of debt. It’s another way of saying that you owe money, likely to a bank or service provider. But there is a difference between having debt and being at financial risk because of your debt.

Consider a mortgage as one example. Imagine you own a property valued at $650,000, and you owe $375,000 to the bank. Your interest rate is low, and you can afford the monthly payments without compromising your other bills and expenses. In this scenario, you have $375,000 worth of debt. If you decided to sell the property, you would also have $225,000 in equity after repaying the bank. You could use those funds to go on a trip, purchase another property, etc.

In another scenario, you may owe $9,550 on credit cards. The average interest rate on those credit cards is 17.85 percent. The minimum you must pay on those credit cards is $293; at that rate, it will take you 22 years and four months to pay them off completely — you would also pay an additional $9,300 in interest. You could pay those debts off in less than two years if you doubled your minimum payment ($585 per month), but you would still pay more than $1,580 in interest. That’s almost three full payments!

Some debts can help you improve your earning potential and help you build financial wellness. Other debts signal that you may be living beyond your means and should re-evaluate your spending and financial health.

Let’s look at some indicators that can help you determine which path you’re on.

Do you have a budget? Or are you overspending?

Having a budget and sticking to it is one of the most important things you can do to maintain your financial health.

Break down your expenses and organize them into a monthly plan. Groceries, gas, insurance, entertainment, exercise, travel: if you’re going to spend it, put it in your budget.

List both the expense and the amount you can afford to spend on it. It’s often helpful to refer to your past bank statements (three months is a good number) to understand how much you’ve spent in the past.

Subtract the budgeted amounts from your monthly income. Do you get a positive or negative number? If it’s the latter, you’ll need to reduce your budgeted amounts. Spending more than you earn every month can only lead to debt and the stress that comes with it.

Once your budget is in place, stick to it! The state of your budget and related spending habits are a strong signal of your financial health.

Are you up to date on your payments? Or do you have late fees and growing credit card debt?

Now that you understand your costs, it’s time to examine how they’ve historically impacted your budget.

Are you making payments on time? Are your payments up to date? Are you paying off your credit cards to zero every month, or are you only paying the minimum?

It’s not only the traditional debts like credit cards, loans, mortgages, and lines of credit that can snowball into big, unmanageable debts. Falling behind on smaller payments like utilities, mobile phone bills, and taxes can also lead to debt. These can come with hefty late fees that negatively impact your finances and credit.

Make a note of any payments that you’re falling behind on. Contact your credit/utility/service providers to arrange a payment schedule that fits your budget. Ask if they’d be willing to waive any late fees or interest charged to your accounts.

Another helpful step to avoid falling behind on payments is to automate them. This will require having the money in your account when the payments are completed, but that shouldn’t be a problem if you’re sticking to your budget.

Do you have a positive net worth? Or a negative net worth?

Your net worth is the amount of money you have to your name after subtracting all your debts from your assets. It is not a number you should be overly obsessive about. Still, it is a good indication of whether you have enough savings or too much debt.

To calculate your net worth, first, add up all of your money and property. This includes:

  • Savings in the bank (savings and chequing accounts)
  • Equity in your house and other real estate (market value less mortgages)
  • Equity in vehicles (market value less loans)
  • Investments (TFSA, RRSPs, and other investments)
  • Any other high-value property you could easily sell (art, recreational vehicles, jewelry, etc.).

Next, add up everything you owe. This includes:

  • Mortgages
  • Auto financing
  • Credit card debt
  • Loans
  • Lines of credit

A positive net worth means you could — in theory — afford to pay off all your debts with the assets you own. It doesn’t necessarily mean you should. But it indicates that you’re not living significantly beyond your means.

A negative net worth means you cannot afford to pay off all your debts, even after selling everything you own. You would technically be insolvent and should prioritize reducing the amount you owe.

Whether you have a positive or negative net worth, we do not recommend making any financial decisions (especially those related to debt) based on that information alone. This information is strictly for understanding your financial wellness. Insolvency proceedings like a Bankruptcy or Consumer Proposal can protect certain assets and may provide a more affordable path to debt freedom. We always recommend speaking with a Licensed Insolvency Trustee or financial advisor before making significant financial decisions.

Are you planning the future? Or have you done no financial planning?

Savings. Retirement. Dream vacations. The sooner you start planning, the better off your long-term financial health will be.

Financial planning is a powerful strategy that will increase your financial well-being now and in the future. If you haven’t done any planning, you risk hitting obstacles in the future.

Think about the challenges, needs, opportunities, and goals you will likely face in the months and years ahead. The only way to succeed in these areas is by planning for them. Let’s consider a few:

  • Retirement: Do you know how much income you’ll need in retirement? Will you have enough money for retirement based on your current savings rate? Will you have any debt in retirement?
  • Emergency fund: Do you have enough money saved if you need to be off work for three to six months for any reason? Can you afford an unexpected auto or home repair?
  • Education: Do you want to help your children with post-secondary schooling? Do you want to go back to school to earn a degree?
  • Homeownership: Are you planning on buying a house? How much do you need? Have you started saving for a down payment?
  • Vacations and other big-ticket purchases: Planning can make it possible to buy a new car, travel to a tropical destination, or buy a new computer without the stress and costs of added debt.

Whatever financial planning looks like for you, embracing the ongoing process of looking forward and taking proactive steps to reach your goals will contribute to better financial health.

The beginning of the journey

After asking these questions, you may have discovered that your financial health is better than expected. If so, that’s excellent news — keep at it.

If the answers to these questions suggest that you’re at financial risk, it’s time to start making changes, especially regarding your debt. If you haven’t already, we recommend creating a budget and a plan to reduce your credit use and the amount you owe. You can also schedule a Free Confidential Consultation with a Licensed Insolvency Trustee for an assessment of your situation and customized advice on your next steps.

If you’re not quite ready to reach out yet, don’t worry. Our next blog can still help on your journey with a full review of the self-service tools MNP provides to assess your debt.

Next Blog: Part 2: Debt tools and how to use them

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