(Guest Post)
Debt can be a tricky thing to manage when it comes to maintaining a healthy financial outlook. Years of consumerism has left millions of American families struggling under the burden of too much debt. But if experts are correct and not all debt is bad debt, then how much debt should you really be carrying as a consumer at any given time?
An easy way to determine how much debt you should have is to use your DTI (debt-to-income) ratio as a gauge to measure the maximum amount of debt you should carry at any one time. Your debt-to-income ratio is calculated by comparing your total monthly income to your total monthly debt payments. Ideally, you should only be using about 36% of your income on debt payments each month. This level of debt allows you to easily afford your other monthly expenses, develop an effective saving strategy, and make investments that help you reach your long-term financial goals.
With this in mind, let’s say you make $45,000 per year as a salaried employee, single with no kids. After taxes, insurance and 401(k) contributions are taken out you are left with about $1,250 per paycheck. This means your net monthly income is $2,500. If you multiply this amount by 36% you get a total of $900. All told, your monthly debt payments should not exceed $900. Bear in mind that this amount includes your mortgage or rent payments, car payments, insurance payments, student loan payments, credit card debt payments and other obligations you may have, such as court-ordered child support or alimony payments.
If you only want to focus on credit card debt, which is typically the type of debt that causes the most problems for consumers, most experts recommend you should only carry credit card debt equal to 10% of your income. So, if you bring home $2,500 each month, then your credit card debt payments should not exceed $250. If you are spending more than that on your credit cards, you need to create a strategy that allows you to reduce the debt quickly or consolidate the debts to combine them into one low monthly payment.
If you need to consolidate and have excellent credit, you may be able to consolidate the debts using a credit card balance transfer or an unsecured personal debt consolidation loan. Both of these options allow consumers with high credit ratings to consolidate debt on their own successfully. However, if your credit scores are low, then you will not qualify at the right interest rate. If the interest rate is too high, you can potentially make your problems with debt even worse. In this case, if you have low credit or bad credit, you would need to consolidate debt in a way that doesn’t require you to have good credit scores. Contact a nonprofit credit counseling agency to speak with a certified credit counselor about enrolling in a debt management program.
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This is a guest post courtesy of Consolidated Credit debt counseling service. Follow them on Twitter.