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Acceptable Debt: How Much is Too Much

Posted in Main Blog
August 02, 2016 by BCCU Share on: Share on Facebook Share on Twitter

Money bomb


Do you have too much debt? Try our calculator to find out.
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These days it’s pretty safe to say that everyone’s bound to experience debt (in some shape or form). Despite this unfortunate reality, debt can be a very necessary part of life. Whether it be mortgages, credit cards, or loans, debt can be essential to making ends meet for both everyday purchases and long-term investments. But when does it become too much? And, is there an acceptable amount of debt?

Questions that help

Frankly, the answer will vary for different people. But if you’re worried about the amount of debt you are in or whether or not you should make that next big purchase, ask yourself the following questions:

1.    What is your annual income?

2.    Do you have any existing debt?

3.    If you do have existing debt, how long are you willing to take to pay it off?

Once you’ve assessed your financial standing, you can start determining if you have an acceptable amount of debt based on your income. From there, you can establish whether or not your debt is too much and how you should be paying it off.

What is your ratio?

bills and piggy bank balanced on a fulcrum

Credit cards, money, loans, income…what is your debt to income ratio?
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Start by finding your debt to income ratio. First, you’ll need your monthly income, which you get by dividing your annual income by 12. We’ll compare this number to the amount of debt you will need to pay off per month. Add together any non-housing fixed monthly payments (or estimate non-fixed monthly payments at 4% of the total debt you owe) for any credit cards or loans that you are currently paying back. Then, calculate your ratio using this formula:

         Monthly debt payments / Monthly income = Your debt ratio*

For example, if your monthly income is $2500, and you pay $500 to pay off your loans every month, your debt/income ratio is 0.2, or 20%. In general, the lower your ratio, the better able you are to handle paying back your debt.

What does your ratio mean?

                     <10-15% is the ideal ratio. You have all your payments covered and are financially comfortable.

                     15-20% is manageable if you aren’t looking to incur any more debt, but be cautious.

                     Over 20% is not affordable.               

If you have a mortgage on top of your basic non-housing debt, add this to your monthly payment and divide this new monthly debt payment by your monthly income. If this number is higher than 36%, it might be time to dial it back, consider cutting your costs, and pay down some of your existing debt.

Reasonable debt load

A good debt rule to follow is the 28/36 rule, which states that a household should not spend more than 28% of their gross income on housing expenses, including associated taxes and fees, with a maximum of 36% on total debt per month as calculated above.

So while debt is not always a bad thing; in life, it may not always be avoidable. By determining your debt ratio, you’ll know whether you should take on more or just focus on paying back what you’ve already incurred.

Need help managing debt?

At Bellwether, we have the tools and resources to help you effectively manage debt load. Call us at 603-645-8181 or visit one of our branches:

  • 7 Leavy Drive, Bedford, NH
  • 425 Hooksett Road, Manchester, NH
  • 409 Amherst Street, Nashua, NH

We’re always here to help!




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