How much is too much debt?

Seems like a silly question doesn’t it? “No debt,” would be the obvious answer, but unfortunately that is not a realistic goal for the majority of people. A report from Nerd Wallet in 2015, stated the average household credit card debt is over $15,000 in credit cards, and $130,922 in total debt.

You hear all the time about how important it is to save money and reduce debt, so having a reasonable goal in mind would be helpful.

Debt-to-income ratio

Since each individual has their own unique life and situation, it all comes down to numbers. The best way to determine how financially stable you are is to calculate your debt to income ratio.

First , add up your monthly income, including any child support, alimony or any other major sources of income. Next, add up all your monthly debt obligations. This will include major debt such as payments for mortgage or auto loans, as well as monthly bills for things like utilities. Divide the total debt by the total income and multiply that number by 100 to get your ratio.

36% or less  is considered good. You’re in great shape and should be comfortable enough to save or invest your money.

37% to 42%  is considered safe. Your debt doesn’t consume you, but you may only be saving a little. You may want to take steps to reduce your debt, such as transferring credit card balances to a low-interest card or taking out a loan for debt consolidation.

43% to 49%  Indicates trouble. Do not fret though , there are ways to help. It means you are not saving anything and finding it more difficult to make ends meet. Consolidating your debt would be a smart move.

Over 50%  means you need help. Don’t panic if you’re over 50%. A lot of people are in the same boat, but you should take steps to improve your situation. Speak to a financial counselor and look at your options to help alleviate some of the burden. There are several options to help you get out of this area and into a better ratio, but sometimes some real hard decisions will have to be made to move forward towards success.

Warning signs of too much debt

  • You spend more than you earn and rely on credit cards between paychecks.
  • You skip certain bills in order to pay others.
  • You only make the minimum on your credit card.
  • You’ve maxed out or are close to maxing out your credit cards or line of credit.
  • Some of your debt has been sent to collection agencies.

Ways to make a successful improvement

Having high debt can impact your credit score and can have a future impact such as getting a new loan, new employment, and your health. Here are some tips to help make the transition a smoother and healthier one. Here are some quick tips to get started on your path to financial wellness.

  • Establish a savings plan– You should have a short-term and a long-term savings goal. Short term goals are for insurance, auto repairs, holiday gifts, etc. Long-term should be for future down payments, kid’s college, and retirement.
  • Save First– Don’t try to save out of whatever money is left over after bills. There will not be any. You need to pull it out first to really see what you have to live on.
  • Involve your family in budget planning– A successful budget isn’t imposed on family members, it emerges from consensus. If everyone in the family doesn’t feel their interests have been considered, they will not be motivated to make the spending plan a success.
  • Plan, prioritize and be patient– Some people prefer to start paying off their largest highest-interest-rate debts first. Others might want to start paying off smaller debts in their entirety, while chipping away at the larger more imposing ones. Regardless of how you approach it, you need a debt reduction plan , and patience. It takes a real focused attention to get out of debt and it takes time to make progress.

Be proactive and make sure the goal is a realistic one. Know your limitations, and be resourceful. At Day Air we have a variety of ways to help assist in your situation. It has and forever will be our mission to enhance our members well-being.

By Kevin Van Bibber – Special Services Manager

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