When it comes to living with debt, it’s not always obvious or clear just how much debt is too much debt. Like most things related to finances, this depends on a lot of different factors. It’s possible to have too much debt no matter your income level.
The word debt often has negative connotations, but debt can be okay if it’s managed properly. For example, you could go into debt to buy a house (ie. a mortgage) and have this be a good, long-term investment. Similarly, you could go into debt for your business to help you purchase the assets you need to succeed.
Of course, there’s another side to this equation. You could also be in over your head with your debts, or dealing with unsecured debt like credit card debt. If you’re unable to pay your debt back on time or you’re struggling to make ends meet, odds are your level of household debt is too high. In this guide, we’ll help you determine where you stand so you can take the next steps forward.
What Factors Play Into Your Household Debt?
Your household debt is any debt you pay back regularly. This includes your mortgage, car loan, credit card debt, personal loans, and so on. Once you’ve added all of these payments up, you’ll still need to consider a number of factors. These are different for everyone.
The things that matter most are:
- Amount owed – Are you almost through paying off the debt or do you have a long way to go?
- Interest rate – In general, a low interest rate means you don’t have any reason to be alarmed. However, a high interest rate, like for a credit card, could be a bad sign.
- Household income – How much money do you make each month to put towards your debts?
- Expenses – Your debt is only one portion of your monthly expenses. You also have to pay for housing, utilities, food, and so on.
- Stage of life – If you’re early in your career, having a little bit of debt might be okay. On the other hand, too much debt too soon (or later in life) can be a recipe for disaster.
- Spending habits – Are you living within your means with smart money habits?
- Savings – Do you have money put away in an emergency fund just in case? Or will you need to rely on more debt if you get in a sticky situation?
- Career prospects – Lastly, what is your earning potential and are you at risk of losing your job?
Consider these questions above. How does your financial picture look with all of this in mind? These key factors are what provide the most clarity when determining how much household debt is too much.
Understand the 28/36 Rule
Another important thing to consider when determining whether you can handle your level of debt is the 28/36 rule. This is a way to calculate reasonable debt load, and it’s a good place to start.
According to this calculation, each household should only spend up to 28% of their gross income on home-related expenses. This includes things like mortgage payments, home insurance, taxes, and any additional home-related fees.
Each household should spend no more than 36% of their income on debt overall. This includes housing, car loans, credit cards, etc. For example, if you take home $4,000 a month, you should not be spending over $1,120 on housing expenses and $320 total on other debts each month.
Can Living With Debt Be a Good Thing?
There’s a lot of confusion between what counts as good vs. bad debt. It’s hard to paint a purely black-and-white picture. In general, debt is okay if it’s debt you can afford. That means you have a reasonable, effective plan to pay it off quickly and within your means.
There are some types of debts that are better than others:
- A home mortgage
- Student loan
- Home equity loan or line of credit
- Small business loan
Good debt is anything that might bring long-term gain. Investing in your home or your education, for example, is likely to pay off in the long run. On the other hand, spending more than you can afford on electronics with a credit card is not a good investment.
The Bottom Line on Household Debt
At the end of the day, there’s no one-size-fits-all when it comes to debt. What’s true is that if you’re struggling to find your way out from under a debt, no matter the type of debt you have, it’s time to take action.
The experienced professionals at Debt Busters are here to help. With over a decade of experience in all types of debts, our experts are ready to help you create a debt solution plan that’s right for you. Contact our team to get started today.