Sandra Pierce, Senior Vice President & Investment Advisor, The Fox Pierce Segal Group and 'The Bag Lady of Bay Street' came by the show to discuss a very timely issue - reducing debt.

Debt is like cholesterol - there's the good and the bad!

GOOD DEBT:

• Not all debt is created equal - in a perfect world it would be great to have no debt.
• Most often, a mortgage is an example of good debt; few of us could own a home without taking on a mortgage - your house is an asset that will appreciate over time.
• Loans to help pay for university or college are another example of good debt. With a better education we will earn more, which will allow us to pay off those loans and finance the lifestyle we want.
• Borrowing to make an RRSP contribution is generally good debt, provided you either pay it back within the year or with your tax refund.

BAD DEBT:

• The ultimate bad debt - is credit card debt! - Shania Twain says it best in a song from 2002 Ka-Ching - "we've created a credit card mess, we spend the money we don't possess"
• Canadians owe about $240 billion on credit cards and credit lines
• Credit card debt is fine IF you pay the balance in full every single month. But if you don't, you are living beyond your means and you will end up paying so much for your purchases. I touched on this the last time I was here and it's worth repeating.
• Some credit card issuers allow you to pay only 2 percent of your balance off each month. That means that, on a five thousand dollar credit card bill, you would only need to pay about one hundred dollars a month. At 13 percent interest, you'd need 27 years to pay off your balance and you'd wind up paying for everything you bought TWICE OVER when you include the interest you've paid.
• At 19 percent interest, that same debt would take you 54 years to pay off, and you'd end up paying your bill more than FOUR times over!

How do we know how much borrowing is too much?
Bankers recommend following these prudent rules for borrowing:

1) Our monthly housing costs - which includes the mortgage payment, utilities, taxes, insurance -should not exceed 32 percent of your gross monthly income

2) Your entire debt load should not be any more than 40 percent of your gross annual income

What are the danger signs of too much debt?

There are many danger signs, but the four most important ones are:

1) Finding that you can only pay the minimum that's due on your credit cards.

2) Having little or no savings

3) Losing sleep because of your finances

4) Fighting with your spouse about money

What can we do if we find ourselves in this kind of debt trouble?

There are five "MUST DO's" to get yourself out of debt:

1) Understand exactly how much debt you have. Know your balance on every credit card, the minimum payment, what you actually pay, and the interest rate you're being charged. According to a recent survey, 42 percent of Canadian credit card holders have no idea what rate they are being charged!

2) Know your financial situation - knowing how much you owe is crucial but just as important is knowing how much you spend - so make a list of all your expenses - all too often we underestimate the amount we actually spend relative to what we are earning.

3) The budget! - Probably the single most important thing you can do to get out of debt - and stay out of debt - this is just a written plan for how you intend to spend your money each month.

4) Move from "High to Low." That is, visit your banker and see if it's possible to exchange your high interest rate debt for low interest rate debt.

The interest you're paying on your credit cards could be as much as 15-25 percent. Your banker could lend you money to pay off all your cards. The bank adds your debt onto your mortgage or line of credit where it costs you a much lower rate-probably as low as 3.5 percent to 5 percent. You will be carrying the same amount of debt, but at a much better rate.

People get into trouble when they start using their cards again. Have a PLAN -and look beyond your debt to what's next when it's all paid off! Look forward to a trip, a home renovation or a new car. Make sure you have some light at the end of your tunnel and you're more likely to stay on track.

5) Make it a family project to start reducing your debt. Get everyone involved! If you have teenaged children, get them to suggest expenses that could be cut or things they could do to help improve the family's financial situation. Involve them! They will be less resentful of the budget cuts, and they'll get a good education about being fiscally responsible adults.