What is Too Much Debt?
Americans are hemorrhaging with maxed-out credit cards. This is a product of buying too much home and fancy cars or just trying to keep up with the rising cost of the daily costs of life.
But everyone (for the most part) has some debt, even if it is just student loans and the mortgage payments. How do you know when you are over your head in debt and need to cut back?
Sadly, the answer is, if you qualify as the typical American household, you do not budget appropriately and have already managed to over-extend yourself and have too much debt. According to USA Today, America has $943.5 billion in outstanding revolving debt, which is only worsening as the economy continues to create a financial squeeze.
Most people will acknowledge that they want to take control of their finances and eliminate debt, but more likely the problem will just continue to get worse. That’s because debt is a lot like the attic or storage closet that you know needs to get organized.
You are well aware that there is a problem that you can solve, and you know, and you know it’s something you have to tackle or it will just continue to get worse. But it is very easy to keep putting it off for another day. It is also easy to just keep adding a few more tiny purchases to the problem because, “it’s already a mess. This one extra little purchase won’t make it any worse.”
Unfortunately, those little extra purchases make the debt problem much worse. Just like people who get rich by taking advantage of letting their small investments compound into big accounts over time, your debt also compounds. All the little bills quickly add up, and the interest payments just get bigger and bigger.
But When Do I Have Too Much Debt?
The simple answer is, when your expenses exceed your income. At this point your personal finances are spiraling out of control and you will likely find yourself in a in a situation that is difficult to resolve on your own. This is a position that you want to avoid at all costs. If you are in a serious debt situation, you may want to consider seeking professional help.
Ideally, though, your debt should not exceed 36% of your total income before taxes. This includes your mortgage payment, which should be below 20% of you pre-tax income.
By keeping your debt to a minimum, this will allow you to build an emergency fund and contribute more to your investment accounts. This will keep you safe from being “upside down.”
If you’re prudent enough to put the extra cash away in a high-yield savings or investment account, your chances of retiring a millionaire will be in your favor.
Keep all of your expenses and debts below 36% of your income, and use the remaining funds to put towards savings or your retirement account.