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It’s hard to give an exact figure when we ask how much debt is a reasonable amount of debt to have. Of course, it depends on so many things, such as the stage of life you’re at, your salary, your outgoings, and so on.
Investopedia suggests that a good rule-of-thumb to calculate a reasonable debt load is the 28/36 Rule. The rule suggests that households should spend no more than 28% of their total income on housing expenses (this would include things like mortgage payments, home insurance, and so on), and a maximum of 36% on total debt service (this would include things like car loans and credit cards.)
Let’s look at an example. If you earn $50,000 a year, your housing expenses should not go over $14,000 a year or about $1,167 per month.
Stage of your life
As mentioned earlier, the time of life that you are in really make a difference. If you’re a student, you may find yourself with a lot of debt because you have a student loan. This could be worrying to you – but put it into perspective. Wonga ZA suggest that there is a thing as ‘good debt’ and ‘bad debt.’ School fees, for instance, would be considered good debt. This is because they are an investment in you, your education and your possible future career path. You may earn more in the long run because you have had this education. Some debt may be harder to categorise – like a large car loan, for instance. The car may help you get to a job that earns you more money than a job closer to home, that you could have walked to. In this instance, you’d class your car debt as good debt. However, if the car is a brand new car which is very expensive, and perhaps is not necessarily a need but more of a want, you might choose to class that debt as bad debt.
There are many easy examples of bad debt – holidays, shopping for clothes, expensive indulgences and so on. These are easily identifiable and can be difficult to stop if you don’t have the will power.
Avoiding bad debt
You need to avoid bad debt because it can easily get on top of you. Bad debt, or signs of bad debt, could include:
- Many payday loans.
- Title loans.
- Any debt that has you paying two or three times over for whatever you’re borrowing.
- Your consumer debts total half or more of your current income (e.g. credit cards.)
- You’re borrowing from one credit account to pay another.
- You’re paying late repayment fees a lot.
- You’re losing sleep over debt.
The more you impulsively spend, the more likely you are to run into trouble. Repayments may become difficult to meet, and you could incur late payment charges. Every time you make a purchase with a loan or borrowed money, you should be sure that the loan is serving you well and is a careful, sensible consideration.
Most people have debt
If you think you have too much debt, you’re not alone. There are many people who have some kind of debt, whether this is a mortgage or a credit card, or even use of their overdraft. It is how you manage and live with the debt that makes a difference.
There’s a lot you can do to improve your financial situation. The first step would be to accept that you have the debt and that you need to address your issues with spending. Counsellors can help you get to the bottom of why you overspend.
You may also want to speak to a financial advisor about consolidating debts to make them easier to pay. Some debts can be written off, but you’d need to seek specialist help to do this. Some companies will be able to help you to stopping creditors from contacting you about payments, which can often be stressful to deal with.
Remember to talk to family and friends about what’s worrying you, if you feel that debt is getting too much. They may be about to help you out in the short term (don’t agree to a loan from them though if you can’t later repay it as this could cause further issues own the line.) It is also good just to talk through your problems and help to put it all into perspective.