Frozen: Time for our household debt and debt-to-income ratio to melt down

DH = Dear Husband

Resolutions unmet – and becoming less possible

“Paying down debt will be a New Year’s resolution for a growing number of Canadians . . . Debt repayment has been cited as the top financial priority in CIBC’s annual survey for five years in a row.” The CBC ‘s report at the end of 2014 confirmed what I had seen at the bank for the second year in a row: a hand-out about Canadians’ top financial goals for the coming year. I saw a similar hand-out at the end of 2015. And guess what? Debt-repayment was still our top financial priority.

But our numbers suggest that we haven’t done so well at sticking to our resolutions. Average Canadian household debt keeps rising. And our average debt-to-income ratio keeps rising too – meaning that we’re making it less and less likely that we’ll succeed at tackling our debts. “In an analysis examining the economic risks of rising household debt, the Parliamentary Budget Officer predicts that the debt-to-income ratio will hit its highest level since 1990, reaching 174 per cent later this year, up from 171 per cent at the end of last year . . .” wrote The Globe and Mail’s Tasmin McMahon January 19, 2016. ‘That will leave Canadian households ‘increasingly vulnerable to negative shocks,’ such as rising interest rates or a drop in income’ . . .”

Debt-to-income ratio: “the acid test”

A household’s debt-to-income ratio is its total debt (credit cards, student loans, car loans, lines of credit, mortgages) divided by total take-home pay. In her book Broke: How Debt Bankrupts the Middle Class, Katherine Porter includes the work of Robert Lawless. “The acid test for the ability to service debts,” Lawless states, “is the ratio of debt to income” (Porter, p. 111).

Our years of high debt-to-income ratio

Like many Canadians, DH and I lived above our means for many years. Our “negative shock” came in the form of DH’s job loss in the late ’90s and a subsequent roller coaster ride of high-tech employment uncertainty that lasted until 2003 – when he got off the roller coaster, and onto a period of under/unemployment that lasted for six years. In 2008, our debt-to-income ratio was 315%. We didn’t know it at the time, and for my part, I certainly wouldn’t have understood what it meant even if I had.

Included in Lawless’ work is a table showing the average debt-to-income ratio of Americans who filed for bankruptcy in 2007.  It was 322%. American and Canadian stats are never exactly the same, but the point is clear that by 2008, we were in a very precarious financial situation.

In 2009, our fortunes turned when DH invested in his own business. It was an encouraging time, and as the business succeeded, our hopes rose. So did our debts. By 2010, while our household income had increased, our business line of credit peaked, and our debt-to-income ratio hit 350%.

Our resolution to pay down debt

For a while, we enjoyed an uneasy peace, happy to be “back to normal”, but checked by a vague sense that “normal” was hazardous. Our aha! moment came in June 2012 with a listen to Dave Ramsey’s CD book, The Total Money Makeover. Debt. The hazard was debt.  And we made our resolution to pay it down. By this point, although we still didn’t know it, our debt-to-income ratio was over 250%.

My awareness of debt-to-income ratio came after we were a few months into our debt-reduction. As a new debt-blogger, I had developed an awareness of news relating to finances – the type of news that, previously, had always been white noise to me. DH and I had both heard that Canada’s average household debt-to-income ratio had reached a record-breaking 163%. “That’s almost exactly where we are,” DH said at the time. But as I did some research for a blog post about it, I realized that wasn’t the case. The debt-to-income ratio is calculated with take-home pay – not gross income as DH had thought – and for the first time, we realized just how worse-than-average we had been.

Fast-forward to March 2016: our debt-to-income ratio is 90%. Having paid off all consumer debt and all business debt, we’re left with a mortgage that is shrinking by the month.

How have we done it?

DH and I were typical of middle-class Canadians as we lived above our means. We were typical in our acceptance of debt as normal. We shot way past typical in terms of debt-to-income ratio when our “negative shock” hit. And we were typical in making a resolution to pay our debt down. But we haven’t been typical in the way we’ve followed through. Because unlike most middle-class Canadians, we have followed through.

Every once in a while, a story like Sean Cooper’s hits the news. The single 30-year-old paid off his $425,000 home after only three years. Living in the basement of his house so that he could earn rental income from the main floor, he worked three jobs and lived a life of extreme frugality to accomplish this feat. I admire Cooper.

But our story isn’t like that.

We haven’t sold or rented out our home or our cars. Our take-home income has risen a bit since 2012, but by no more than 10%. I think that most people, when they consider what is necessary to pay down their debts, get subjected to a bombardment of extremes in their mind’s eye. Rice and beans. Every night. Peeing into bottles like those people on reality TV. Dumpster diving. It doesn’t have to be that way.

Here is how we have made debt-reduction a reality and not just a resolution:

  • After realizing that we wanted to get out of debt, we accepted the counter-intuitive idea that it wasn’t about the money. It was about us. DH and I each did some soul-searching to uncover our respective “money blueprints“, and we started our journey out of debt with an understanding that our biggest obstacles would come from ourselves.
  • We have let go the compulsion to compare ourselves to others. People make different incomes and have different expenses – not to mention different values and tastes. It’s impossible to know who is financing their lifestyle with debt and who isn’t. And it doesn’t matter. We’re playing out our story, not anyone else’s.
  • We have argued – many times. You can call it “working things out”, but that makes it sound pleasant. It often isn’t. But it’s much, much more effective than being in denial.
  • We have tracked our expenses so that we know where our money goes.
  • We have created monthly budgets to be more proactive about where our money goes. (We have been very imperfect in budgeting. But that’s OK! The practices of budgeting and tracking end up reducing what we spend even if we blow it – simply because they have the effect of making us conscious spenders rather than mindless spenders.)
  • We have distinguished between “wants” and “needs”. We’ve cut out many wants, but not all of them. With a philosophy of value-based spending, we’ve been intentional about allowing ourselves some indulgences, and we budget discretionary money for that purpose. For needs, we’ve been more frugal where possible. (For food, we spend about half the amount we used to.)
  • We have come to appreciate the simple things in life. When you’re not travelling or hitting the town, there is time to go for walks, play board games, and have people over for a meal.
  • We’ve become more mindful of occasional big expenses – like our new roof or our dog’s surgery – and when they are coming up, we save for them. Not once have we used debt to finance anything in our almost 4 years of debt-reduction. The question used to be, “Can we afford to make the payments?” Now, the question is, “Can we can afford to pay for it outright?”
  • We keep ourselves accountable. By talking to DH as well as friends and family about all things personal finance (I’ve actually had to rein in on these conversations. Many people are not comfortable with money talk, and some consider it a matter of complete privacy. I think that these are harmful attitudes, but that’s the way it is.) and by blogging and reading other personal finance blogs, I have never given us the option of forgetting our resolution to pay off our debt.

If you’re in debt, let this be your time to turn things around. You don’t have to be extreme, but you do have to make changes. Wake up, look in the mirror, and face what it is you have to deal with. You don’t have to have it all together to make your resolution a reality.

If you have succeeded in paying down debt, what point would you add to the list above? If you haven’t succeeded in paying down debt, what has been your biggest obstacle? Your comments are welcome.

Thanks for reading our report for February ’16! Please check out my weekly posts at Fruclassity.

Join the Conversation


  1. Don’t underestimate the mental aspect of it. The math can be easy, breaking bad behaviors changing habits can be tough. You need to be ready for the journey, focus on the reason you want to make the change. Find ways that will keep you motivated. This will help you stay on track.

    1. “focus on the reason you want to make the change” – Good point, Brian. And it’s best if you can think of it in terms of a positive. Rather than “I want to get rid of the ball-and-chain feel of debt,” it’s better to focus on “I want the peace and freedom that comes with paying off debt.” Thanks for pointing out the importance of vision, Brian.

    1. I have found that to be true too.. For people who don’t blog, it’s a really good idea to read and comment on blogs that speak to their situation. Putting yourself out there increases accountability. Thanks for reading and commenting, Tyler.

    1. A brief, but profound comment, Kay. There is definitely a spiritual side to a struggle against debt – at least for me there has been.

  2. I think paying down debt is at least 30% not running and hiding under the covers at every setback — because there will be many. Or to at least bring a PF book and flashlight.

    I like your attitude toward budgeting. Our lives are far too chaotic to ever truly put spending caps on categories. So I prefer to stay aware of day to day spending instead.

    1. Thanks, Abigail. I remember our first few setbacks after we started our journey out of debt. Each one came like a shock-wave. Now, these “setbacks” are mere blips on the radar.

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