How Much Debt is Too Much Debt?
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.