Debt Management: How Much Debt is Too Much Debt?

Having debt is a common thing in today’s fast paced, credit driven world. Whether it is a mortgage, a car loan, substantial credit card debt, debt is all around us. There seems to be a stigma associated with debt that defines it as being some sort of bad thing. Debt is not necessarily a terrible thing. Often times, there is a very legitimate business reason to carry some form of debt. As long as you are paying the debt off at a reasonable rate, you can carry some. There might come a time, however, when you have too much debt. How do you know when enough is enough? You have to do a full self debt analysis in order to make this call.

If you want to calculate your debt load and your desired debt load, then start by looking at your debt-to-income ratio. This is one of the best ways to determine if your current debt load is too much to bear. There are a few different ways to look at this data. You could include all of your debts, including good and bad debt. The best way to go about this calculation is to leave out good debt like a mortgage and consider only the bad debt like a car loan and credit card balances.

If you want to make a calculation on your debt overload, add the amount of money that you spend every month for bad debt and divide that by your complete monthly income. When you get this number, multiply it by 100 in order to come up with the debt-to-income ratio percentage. This will help you understand the total amount of your income that is going to cover bad debt.

Effective debt management principles will tell you to never carry more than a 10% debt ratio. Some conservative estimates may put that number a little bit lower, but 10% is a good number to shoot for. This will ensure that you don’t have too much bad debt weighing you down.

There is also quite a bit of debt management merit to adding up your total debt. Though things like mortgages and some personal loans could be considered good debt, it is still something that you will have to pay back over time. In order to calculate your total amount of debt, you simply add up the entire monthly debt expenditure (including student loans, personal loans, mortgage payments, etc) and divide that number by your total income and multiply the resulting number by 100. This will give you a total debt ratio %. A good number to shoot for here is 36% or lower. Anything above that puts you in danger should anything unexpected happen.

Carrying too much debt is a poor debt management practice. Though some of your debt might be good debt, it is still important to monitor how much of your monthly income is devoted to paying these things off. If you can manage to keep your credit card debt and other bad debts low, then you can effectively manage the debt by keeping the overall debt ratio at a low percentage.

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Matthew Rankin is the owner of The Debt Weblog - debt management ideas & tips

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