Debt trouble sneaks up on you. Everything can seem fine until all of sudden you owe much more than you can handle. You need to take action before you have too much debt.
While there’s no exact amount that is too much debt, there are a few warning signs that your financial situation is starting to get out of control
Focus on monthly payments, not amounts.
For measuring how much debt you can handle, it’s better to focus on your monthly payments versus the amount you owe.
A $100,000 loan could be impossible to pay in two years, but it can be quite manageable if you spread the payments over 30 years.
You should also consider your monthly debt payments relative to your salary. The higher your salary, the more total debt you can handle.
The 40 percent limit.
As a general rule of thumb, your debt payments should be no more than 40 percent of your monthly income. If you go over this amount, it’s a sign of financial distress.
If 40 percent of your monthly salary is going toward debt payments, it’s going to put a big strain on your budget. Between these payments and taxes, you’ll have almost nothing left for other spending.
“Your debt payments should be no more
than 40 percent of your monthly income.”
The lower you can keep this percentage, the better. However, you need to be extra careful about breaking this 40 percent limit.
The type of debt matters.
You should also consider what type of debts you have when considering how much is too much debt.
Investment debt like a mortgage loan is better than consumer debt like credit card spending. As you pay down investment debt, your payments are building up your future net worth.
When you pay off consumer debt, all the money just stays with the creditor. You won’t see any future benefit.
You can go closer to the 40 percent limit if most of your debt is investment debt. If most of your debt is consumer debt, you should try to stay lower because your payments are essentially wasting money.
The exact amount of debt you can handle depends on your own financial situation. Be sure to keep these points in mind so you can make sure your debt doesn’t become a serious problem.
Photo source: nsbank.com.
Advertiser Disclosure
BadCredit.org is a free online resource that offers valuable content and comparison services to users. To keep this resource 100% free for users, we receive advertising compensation from the financial products listed on this page. Along with key review factors, this compensation may impact how and where products appear on the page (including, for example, the order in which they appear). BadCredit.org does not include listings for all financial products.
Our Editorial Review Policy
Our site is committed to publishing independent, accurate content guided by strict editorial guidelines. Before articles and reviews are published on our site, they undergo a thorough review process performed by a team of independent editors and subject-matter experts to ensure the content’s accuracy, timeliness, and impartiality. Our editorial team is separate and independent of our site’s advertisers, and the opinions they express on our site are their own. To read more about our team members and their editorial backgrounds, please visit our site’s About page.