How much debt is too much?
Practically everyone has debt.
But be honest now: how’s it going these days?
The truth is that we tend to get used to the way things are. Less than ideal situations start to seem normal as time goes by. If you blow a fuse every time you try to use your microwave and your coffeemaker simultaneously then you might train yourself to never use both at the same time – rather than say, getting a surge protector (…again…totally hypothetical).
Which is all to say that you might not even be aware that your relationship with debt is out of whack.
Thankfully, there are a few simple tools to help you determine where you stand with debt.
Debt-to-Income Ratio
A handy mathematical guide to where you stand with your finances is your debt-to-income ratio. As you might expect, it’s a measurement of your debt versus your income and a good way to determine if your debt is out of hand.
To determine the ratio you have to add up all of your debt and divide it by your income. Your debt, in this case, includes your mortgage/rent payments, your car payments, all loan payments (student, personal), your minimum credit card payments and any other court-ordered payments or garnishments (alimony/child support). Your income is just that – everything you make in a month (after taxes have been deducted).
The normal ratio is between 30 and 36 percent. If less than 30 percent of your income is going towards debt repayment that’s considered superb (especially by potential lenders). If your ratio is over 40 percent, however, that’s considered to be extremely high and a sure sign that your debt is potentially getting out of control.
The Debt Test
Take a minute and complete the Financial Wellness test.
Chances are good that if your financial situation isn’t what you want it to be you’ve been feeling it for a while now, even if you’ve thought things were okay.
Everyone worries about their debt from time to time, but if you find that you can’t enjoy your life – that you spend more time worrying about money than enjoying the things you can do with the money you work so hard for – than it’s a sure bet that your debt is overwhelming you.
So start over.
There’s never a bad time to break up with debt. There’s never a bad time to get yourself back on track.
If debt is overwhelming you contact Money Management International today. We offer free credit counseling 24 hours a day, 7 days a week. It’s a great first step to bringing your finances back to the right ratios!