I am sure everyone has heard of the Debt to Income Ratio (DTI) as a measurement of economic health before. As the name suggests, it measures the debt servicing costs to disposable income as a percentage. The maths is simple and you can easily work out what your DTI is.
For example a household takes home $4000 a month.
The debt costs are mortgage ($1200), car payment ($225) and student loan payments ($120) . Total debt monthly cost is $1545.
DTI = (Debt/Income) x 100
DTI = (1545/4000) x 100 = 38%
A 38% DTI ratio is not bad at all. Sadly, this excludes other household costs like food, services, recurring bills and other miscellaneous expenses . If you have credit card debt you should add it to the debt side of the equation. Honesty with this equation will give you a better sense of where you stand.
Now the SCARY stuff!
The DTI for the average household in Canada is a staggering 165% of disposable income and growing! Now I keep mentioning to you disposable income and this means after tax income. When you add the pieces together the picture is bleak. Something to note, the American DTI in 2007 before the housing crash was 163%.
The average Canadian pays 42% of everything they earn in taxes at all levels. E.g. Income tax, provincial tax, fuel and sin tax. Ironically, this excludes hidden taxes like license renewals and other “mandatory” Government fees. With this in mind let us look at some simple numbers.
Jack and Jill,
Pretax annual income – $110,000
After all taxes (at 42%) their disposable income is – $63,000
Multiply by 165% (63,000 x 1.65) = $103,950
Jack and Jill’s debt is $103,950, they take home $63,000 after all taxes. yet this number doesn’t account for the value of goods and services bought to incur the taxes and the monthly debt costs. Jack and Jill actually have very little left for savings.
In the short term, the DTI in Canada will continue to grow with the low interest rate environment. A large bubble burst, for example the housing in Vancouver and Toronto or any other economic gyrations will cause Canada major economic pain. Pay off your debt as fast as you can!
Thank you for reading as always. If my number are off please feel free to let me know!