Reviewing the Real Life Ratio

Lately, I’ve been keeping an eye on the Globe & Mail. I am glad to see more good articles written about house-hold debt. In the past I've written about this topic, buying what’s reasonable versus maximum.

Rob Carrick from the Globe & Mail wrote two excellent pieces on 6 March 2014 and 19 March 2014. In the March 6th piece, entitled “Can you really afford that mortgage? Know your Real Life Ratio”, Rob makes a bold outright statement when he says, "Someone ought to explain the facts of life to the nation’s bankers....Never take a lender’s word for it that you can afford a house." Rob highlights what he calls the real life ratio which accounts for the basic costs of home ownership but also the real world expenses such as education, insurance, and long-term home maintenance. The real life ratio (see attached link, excel sheet) also shifts depending on what stage you are in life including your kids.

In Rob’s second article, entitled “West Coaster making $86,000 can barely afford his modest life,” Rob shares the life of Hamish Telford.Hamish is separated from his wife, has a 7 year old son and a professor of political science who is considered upper middle class living in Abbotsford, BC. Hamish spends over 50% of his net income towards household expenses.  Hamish is hanging and “isn’t looking for sympathy, just some understanding of how hard it is to get by even for a member of the upper middle class.” He is more worried about others, “I can only imagine how stressed the other 95 per cent of the population must feel."

The point of the article was that Hamish had car trouble and needed to spend approximately $1500-$2000 to fix his car and he sadly had trouble doing so. People should think about the Real Life Ratio when considering the home they wish to purchase.

Too much debt?

Last week I spoke a little about mortgages and personal debtload. For the most part, I’d say the large majority of people have theirpersonal debt under control, however thus far in 2011 I have encountered a fewvery nice families where their mortgage payments and personal debts started toget or are out of control. If you think that your debt load is a burden itmakes sense to take a look at your options before things get worse. I don’twant to sound all gloomy as I am an optimist by nature, but I have seensituations where clients are forced to sell their homes due toover-indebtedness.  

If you’re worried about debt, the first thing you want tocheck is credit score and report details. Keep in mind that three major factorscan affect your score.  First, pay all yourdebts on time (i.e. making the minimum set monthly payment). Next, try not tomax out your limits on your credit cards and lines of credit. Finally, try tominimize the amount of credit checks. Credit checks include a new cell phoneplan, new credit cards (yes that includes department store cards) and otherservices where the vendor wants to know if you’d be a good client or not.  

Let’s put a couple things in perspective.  In 2010, as Canadians for every dollar earnedwe spent $1.48.[1] Thisaccounts largely for what is referred as personal or “bad debt.” On the otherhand, often times a mortgage is referred as “good debt.” Our banking system ismuch more regulated than our neighbours to the South but in general asCanadians we still over-spend. The old saying that it’s easier to spend it than earn it really makes sense.  I don’t want to sound too dogmatic this weekbut keeping eye on debt and credit is very important. We often take credit forgranted. When we need it sometimes we don’t have enough and it can work againstthe consumer.

If you have any specific questions you’d like to discuss innext week’s article please feel free to email me.

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[1]Jackson, Dale “Don’t let devotionto RRSPs distract from paying off debt” 17 Feb 2011, Globe & Mail http://www.theglobeandmail.com/globe-investor/personal-finance/rrsp/dont-let-devotion-to-rrsps-distract-from-paying-off-debt/article1893716/print/