Three calculations to assess your debt situation

2021-01-25   minute read

Bradley Milne

MNP’s quarterly Consumer Debt Index consistently finds between 45 and 50 percent of Canadians are $200 or less away from insolvency at month-end. Many are just one unfortunate event — such as serious illness, job loss, or even unexpected home repairs — from stepping over the financial brink.

Recognizing you’re navigating a period of financial difficulty, and acknowledging the need for things to change, is a positive first step in resolving your debt problems. The following tools can help you assess the situation and decide whether it’s time to seek professional debt advice from a Licensed Insolvency Trustee.

Total debt servicing ratio

Your total debt serving ratio (TDS) shows the proportion of gross monthly (pre-tax) income you’ve already committed to debts such as credit cards, lines of credit, vehicle loans, and mortgage. As a rule, you don’t want your debt servicing costs to exceed 40 percent of your gross income.

A ratio higher than 40 percent will make it exceedingly difficult to keep up with your payments and savings goals. Lenders are also unlikely to grant or extend further credit if your TDS is higher than 40 percent — and those that will are typically higher-risk lenders who apply exorbitant interest and service charges.


To calculate your TDS

[ Gross (pre-tax) income ]


Sum of all monthly debt payments
(e.g. Credit card, line of credit, mortgage, car payment, utilities, etc.)

Gross debt servicing ratio

Alternatively, your gross debt servicing (GDS) ratio measures the total amount of your gross monthly (pre-tax) income you’ve already committed to your housing costs (e.g. mortgage payments, utilities, property taxes, etc.). Banks are unlikely to grant you a mortgage if your GDS is greater than 32 percent. This is partially why it’s so difficult to obtain a mortgage in some Canadian markets where housing prices have significantly outpaced increases in household income.


To calculate your GDS

[ Gross (pre-tax) income ]


Sum of all monthly housing costs
(e.g. Mortgage, utilities, property taxes, etc.)

Net worth

Your net worth is a hypothetical calculation of how much money you would have in your pocket if you sold off all your assets and paid off all your debts. Ideally, you want this number to be positive (i.e. above zero), and you want it to consistently rise over time. It’s therefore helpful to perform this calculation at least once a year to measure your progress.

To calculate your net worth


Assets — Liabilities
(Cash, investments, retirement savings, etc.) vs. (Credit cards, loans, mortgage principal, etc.)

Additional questions

Beyond these three calculations, there are some additional questions you can ask yourself to better understand where your money is going.

Am I using a budget? There are many tools available to record and categorize daily spending. In fact, we have one on our website which we think is especially handy. The results may surprise you and will almost certainly reveal savings opportunities.
Am I robbing Peter to pay Paul? Making payments on one debt using another form of credit, is a clear sign your debt has become unmanageable.
Am I making minimum payments on credit cards? Not being able to pay against the principal for more than two or three consecutive months indicates you may be overspending.
Am I using credit to pay for groceries and other essential items? Not to worry if you have a plan to pay the charges at month end — but if you need debt just to cover basic expenses, that’s a big red flag.
Am I borrowing money from friends or family? Most often people will only borrow from loved ones after exhausting all other options, is this the case for you?
Am I needing to use pay day loan services? High interest lenders may be the only ones willing to lend the money you need to make ends meet, but they also rapidly accelerate and worsen your cycle of debt.
Am I receiving collection calls or letters? If you’re afraid to answer the phone or open your mail, it’s likely time to address your debt situation.
Am I consistently unsure of my financial situation? Lacking awareness of monthly expenses and finances in general (e.g. current bank balance) may be a sign your situation has become overwhelming.

If some or all of these warning signs apply to you, consider meeting with a Licensed Insolvency Trustee to learn about your options and get the relief you need from your debt problems.

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