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How much debt is too much for you and how would you overcome it

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By: Good Nelly
on 30th Dec,2016

How much debt is too much for you? Check out how you can find the answer and what you should do to manage your debts comfortably and pay them off.
How much debt is too much for you and how would you overcome it?

It is true that debt is inevitable. Most of us can’t buy a property or purchase a vehicle without taking out a loan. Moreover, debt helps us build our credit score.

But, the question is “How much debt is too much?”

Will it be possible for you to reply it with a number? Probably not.

A debt is too much when you can’t manage it properly - either you’re not current on the loan or can’t repay it comfortably.

How can you figure out how much debt is too much for you?

Here are a few guidelines to understand how much debt is too much for you:

1 Follow the 50/30/20 rule

This rule means that 50% of your salary should go towards your must-have expenses like food, shelter, utilities, child care, minimum loan payments, etc. You should use 20% of your paycheck to repay debt and save. Remaining 30% is for variable income such as, vacations, eating outs, shopping and other ‘wants’.

Now, let’s talk about some debts separately.

2 Auto loan debt

Most of the people are of the view that auto loans should be within 5% - 10% of your gross monthly income. You should always buy a car with 20% down payment and the loan term should be a maximum of 4 years.

3 Student loan debt

Apparently, student loans are supposed to be good loans since they help you get a degree with which you can start or increase your income. However, college students should borrow an amount which you can repay with 10% of your gross income. So, you have to calculate it accordingly.

4 Mortgage loan

It is better to cap your overall housing cost to 25% of your gross income. You should save at least 20% down payment before you start searching to buy a property.

5 Credit card debt

Now, the most awaited topic - credit card debt. It is not good if you revolve your balances from one cycle to another. Always make a point to repay your existing credit card debt at every billing cycle.

Taking out payday loans and cash advances are not advisable.

6 Calculate your DTI

Apart from above, you can also calculate your debt overload by computing your DTI (Debt-to-income ratio).

Your debt-to-income ratio is good if it’s within 25%; that is, you can spend 1/4th of your income on debt.

Along with that, analyze yourself whether or not you’re able to manage your debts comfortably; that is, you can make the required payments with ease.

Now, the question is, how can you overcome debt if that’s too much for you?

First of all, tackle it head on. To do so, you need to have the mindset that you have to get out of debt, come what may.

1 Set a realistic goal and focus on it

To be debt free, you need to have a realistic goal in your mind. That is, for example, set a deadline to each of your debts.

Then, choose a debt relief method as per your choice.

To start off, you can target the smallest debt to pay off. It will keep you motivated in your debt free journey.

However, don’t forget to make the minimum payments on other debts.

2 Adjust your lifestyle

You may have to adjust your lifestyle as per the current financial situation. For example, stop eating out much and cook at home. It’s a healthier alternative, too. Also, stop going for window shopping and meet your friends elsewhere where you won’t be much enticed to spend more.

Have a look at your current budget and check out where you can reduce your spending.

You can follow frugal lifestyle for some days till you become debt free.

3 Sell the stuff you no longer require

Do you have anything which you can do without? If yes, then sell off those items. It may be a piece of furniture, a collection of good and DEDs, and use the money to repay debt. Just find out these items and organize a garage sale.

4 Stop using your credit cards for the time being

It is advisable to use credit cards till you repay your last cent of unsecured debt and be current on the secured ones. However, you can use credit cards only if you can promise yourself that you’ll repay the balance till the last cent, at every billing cycle.

But, if you’re not sure, then it’s better to avoid using plastic money for some time.

After you pay off your debt, start using your credit cards responsibly. It will help you increase your credit score.
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