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I was looking at a breakdown of the Ontario government debt and 11% of tax dollars go to pay interest. I am interested to compare with personal finances, would 11% of annual income as interest be reasonable? What percent of income going to interest is common? Ideal?

  • "on consumer debt?" As opposed to long term debt like mortgage, auto or student loan debt? – RonJohn Oct 30 at 18:55
  • Yeah, i don’t like idea of including mortgage debt because it’s backed by an appreciable asset. But car loan and student loan could be included because they are debt which will need to be paid off and have potentially specious value. – Andrew Richmond Oct 30 at 19:02
  • @AndrewRichmond Agree that mortgage can be treated differently but you can still have too big of a mortgage and be "house poor". – D Stanley Oct 30 at 20:24
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    Is it 11% goes to pay interest, or is 11% goes to paying off bonds? – mhoran_psprep Oct 31 at 13:11
  • @mhoran_psprep: It would be very unusual for any Western country to pay off debt at such a rate. And in fact Ontario is confronted with a debt explosion (+150% since 2002, the last time it shrunk). In such bad circumstances, a default is likely. I'm surprised it's only 11%. – MSalters Nov 1 at 13:49
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What percent of income going to interest is [...] Ideal?

0%

It might have sense for the government to borrow as an inversion: with the money they have today they build infrastructures, public services, etc. that will in turn help the economy grow which will mean more revenue and less spending (e.g. social spending) in the future1.

You are not a government, and your consumer debt is, in general, not an inversion2. Getting in debt to buy that shiny iPhone instead of a more basic phone will not help you get better income later on.

Additionally, the credit rating of the government will usually be way better than yours, so the government can get money by paying a far lower interest than you do. This is specially true if you compare it with a consumer loan, which usually has a rather high rate.

And if all goes south, the government often has the option to increase taxes to increase revenue and paid loans, while your ability to increase your income is limited3.


1And of course some would argue that the government spending 11% on interest is far from being ideal, too.

2There could be some exceptional case, like needing a vehicle to get to work. But even in that case you should aim at the minimum needed to cover your actual needs and do not get any more debt than necessary.

Another exception would be a mortgage, as you are paying interest for the loan but A) it is usually cheaper and B) you are at the same time avoiding to pay rent.

3If you could easily increase your income now you would already have done it, wouldn't you?

5

Frame Challenge

11% of (Ontario) tax dollars go to pay interest

I am interested to compare with personal finances, would 11% of annual income as interest be reasonable? What percent of income going to interest is common? Ideal?

You're conflating good debt (building and maintaining infrastructure) with B-A-D BAD debt (living beyond your means).

It's also dangerous to conflate debt incurred by a government which gets it's money via continuous tax streams vs. individuals who can lose their jobs.

(This is not to say that governments can never go bankrupt. Just look at Detroit, for example.)

  • so it's ok to borrow money to maintain my house? – Michael Oct 31 at 1:56
  • @Michael knowing that you will have to repair and maintain the house, it's better to save up beforehand, it's better to save up beforehand. However, that's not always possible. Thus, borrow to maintain your largest asset (which is not the same as borrowing to go on a swanky vacation or buy a too-fancy car). – RonJohn Oct 31 at 2:09
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    @Michael It's better to not go on vacation before your car breaks, so you have money, than to borrow money to fix your car. But it's better to borrow money to fix your car than to lose your job and then have even less money. – user253751 Oct 31 at 17:39
  • Ontario's expenses are not all investments. Health is just an ordinary expense and should be paid from annual taxes; education on the other hand is a true investment. – MSalters Nov 1 at 13:53
  • @MSalters "education" -- like most other expenses in government -- is a combination of operational expenses (like salaries, heating and some maintenance) and capital expenses (like building buildings and some other forms of of maintenance). Borrowing to pay salaries, for example, is a Bad Idea. – RonJohn Nov 26 at 20:01
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Many personal finance guidelines recommend spending no more than 20% of your after-tax income on servicing debt.

Note that the 20% recommendation is for savings + debt combined. So as you pay off debt, whatever is left in that 20% goes towards saving. Once you are debt-free, continue to save 20% of your income. Step 3 = profit!

Sources:

https://www.thebalance.com/the-50-30-20-rule-of-thumb-453922

https://www.creditkarma.com/advice/i/50-30-20-rule/

  • I think you've misinterpreted the 50-30-20 rule. You should be actively limiting what you spend on needs (50%) and wants (30%), but whatever's left over (20% and up) should be put into debts/savings. If you have debt, you should spend as much as you can afford on it, not "no more than 20% of your income". If your needs and wants only account for 60% of your income, there's no particular reason why you should put only 20% toward your debts, you should throw the full 40% at it. – Nuclear Wang Oct 30 at 18:55
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    I interpreted it more as "don't put yourself in a situation where servicing debt is more than 20% of your income". i.e., don't borrow if you can't afford the payments – Rocky Oct 30 at 19:28
  • I like Credit Karma, but that rule strikes me as odd. Debt and savings should not be from 1 bucket. 15-20% should go to savings off the top. And debt service should come from ‘want’ money. Else, it’s too easy to let debt kill savings indefinitely. – JTP - Apologise to Monica Oct 30 at 23:20
  • @JTP-ApologisetoMonica Although, presumably there shouldn't be any savings if your cash flow is negative – Michael Oct 31 at 1:57
  • You miss my point. The CK article has 30% on wants/ 20% on saving/debt. My priority for that 50 is 15-20% savings, then debt. If nothing left, you get no 'wants'. – JTP - Apologise to Monica Oct 31 at 2:10

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