How Much Debt is Too Much Debt?

Debt is an amount of money that’s been borrowed by one individual and is owed to another. While some amount of debt is necessary to get by in today’s world, there is such a thing as too much. If you find yourself falling too far into the red, it’s also important to know what you can do to control your finances. Here’s what you need to know.

Is There Such a Thing as Good Debt?

Some people might argue that there’s no such thing as good debt, but there are many cases wherein taking on dues can result in a better future. Some examples include:

• Mortgage. In most cases, a house is a good investment. Most people who are able to purchase a house can eventually sell it for more money than they bought it for. However, most people are unable to buy a house without taking on a mortgage. By taking on this good form of debt, they can eventually sell their house for more than they paid, thus making a profit.
• Student loans. It’s very hard to get a good job without going to school. Most people need to take on student loans to go to college, but when they get out of school, many are able to get better jobs that eventually allow them to pay off their debt, and go on to have higher salaries in adulthood.
• Business loans. If you’re an entrepreneur, a business loan can help you start a business that could eventually become your life’s work. Most people find it difficult to invest in the commercial equipment needed to get their business up and running, but loans allow them to do that.

How much debt is too much?

This depends on many factors, including how much you’re making and what kind of debt you’re managing. However, many investors say that a debt-to-income ratio (DTI) that is higher than 35% is too much debt. To determine yours, divide your monthly recurring debt by your gross monthly income.

How can you manage a healthy debt?

• Know how much money you owe. It’s easy to build up debt without realizing how much you owe. Keep track of this amount!
• Always try to pay off more than the minimum amount. Paying the minimum amount keeps you in the red for longer. Make larger payments when possible.
• Decide which debts to focus on first. Speak to a financial advisor to decide which debts should be paid off first, second, third and so on.
• Know when you need help. Know when your debts have gotten out of hand. Get help from a financial advisor to learn more about managing your debts and avoid getting into more.

About the Author: Kathryn Elwell grew up in the Midwest. She has experience in management and human resources, and has been writing on these topics and more for 12 years.