- Your debt is causing you stress, even to the point of losing sleep.
- You are not saving regularly from you paycheck because you need the money to finance your debt.
- Your emergency fund has run out and your debt is still out of control.
- You use your credit cards to pay off debt and now they are maxed out.
If these or other emotionally painful experiences are haunting you, you may need to get a better handle on your debt situation.
- Good Debt: Debt that is taken on to buy something that generally increases in value, such as a home or business.
- Bad Debt: Loans taken on at very high interest to buy things that decrease in value or are rapidly used up.
- Toxic Debt: Debt with sky-high interest rates and/or debt you simple cannot afford.
A good yardstick to use when thinking about your debt is your Debt/Income Ratio. If it is 15% or less, you are likely using debt wisely. If it is greater than 50%, you are likely having a problem with too much debt. What is your Debt/Income Ratio?
Tips for Effectively Managing Your Debt
Here are some useful tips to keep in mind when considering taking out a loan for several common needs or wants:
- Housing: Limit your housing costs to 35% of your income or less. If it is too high, consider refinancing your mortgage.
- Cars and Other Vehicles: Most experts suggest that car loan expense should remain below 20% of your take-home pay. If your debt level is beyond this consider refinancing or buy a less expensive vehicle.
- College and Other Education: Here’s a simple rule: Don’t borrow unless you have to! If you need to finance your college or trade-school education, take on no more debt than you expect to earn in your first year working after college.
In conclusion, debt can be a good thing or a real detriment to your financial well being. By considering the type of debt you are incurring, and by calculating your Debt/Income Ratio, you may be better able to assess your risks. Above all, stay away from Bad Debt and especially Toxic Debt.