Do I have too much debt?
Figuring out if your debt level is manageable often requires evaluating your income and ability to repay. Let’s dive in.
They say ignorance is bliss.
But when it comes to your level of debt, ignorance is about as un-blissful as it gets. Acquire too much debt and your payments (and your anxiety) could exceed a comfortable level. The key is to address your amount of debt head on. Let’s begin.
Know your numbers
With debt, the first number you need to know is your debt-to-income ratio (DTI). Your DTI is an indicator of how much pressure you’re putting on your budget. To figure out your DTI, divide your total monthly debt payments by your gross (before tax) monthly income.
Lenders use your DTI to assess your ability to repay a loan and whether you’re carrying a “safe” amount of debt. While everybody’s situation is unique, maintaining a DTI below 36% will make it easier to be approved for large loans, such as a mortgage.
For extra measure, follow the 20/10 rule
Lenders will often approve you for a mortgage that brings your total debt-to-income ratio to no more than 43% of your monthly income, but you might not want to live on the edge. For peace of mind, consider the 20/10 rule: keep the non-housing amount you’re borrowing to be less than 20% of your annual net income, and keep monthly debt payments less than 10% of your monthly net income.
Heed these warning signs
Beyond your DTI and 20/10 rule, there are other indications that your debt may be too high for you:
- Late payments: If your lack of money leads to paying bills after their due date, that’s a sign your debt payments have exceeded your income.
- Borrowing money to pay back debts: Ideally, debts should be paid using money that is in your savings account already or via regular income such as a paycheck. If you’re using tools like credit cards to borrow money to pay back debts, you’re simply exchanging one debt for another, which can prevent you from making progress.
- No savings: Life can be unpredictable, but savings can help mitigate unforeseen challenges. If you don’t have savings, it may be a sign that you’ve depleted those savings because of those debts.
- You’re losing sleep over financial worries: You wouldn’t be alone. Roughly one third of Americans aren’t sleeping well, and financial worries are a factor.
Empower yourself to make a change
It’s easy to get into debt. It can be more difficult to get out. That difficulty is increased when you’re uncertain about how much debt you have—which leads to anxiety about your ability to pay.
Any financial challenge is more manageable, however, when you know your numbers. Take a deep breath. Take account of your balances and your habits. You’ve got this.