Acceptable Debt Level - There Is Such A Thing!

Like it or not, debt has become a huge part of the North American lifestyle. It truly has become inevitable. However, there are definitive rules to look to when determining if your debt level is too high.

The first rule is that the monthly payments on your debts should be no more than 20% of your total monthly disposable income. Disposable income is your income after you've subtracted the necessities like mortgage or rent, food, utilities and taxes.

Another great rule to follow is to keep your total annual outstanding debt at a level less than 33% of your total annual disposable income. A key to keeping responsible debt levels is to incorporate your debt payments into your monthly budget. The fact is, budgeting for your debt is just as important as budgeting for your savings plan or emergency items.

Tip: Using your credit cards to finance routine purchases or pay for items you cannot afford to pay cash for is a really bad move. It can lead to high debt levels and more trouble than the "want-item" is worth in the first place.

Example of Monthly Debt Budgeting
Let's just say you have after-tax, rent and utility take-home pay of approximately $2,000 per month. Once you have figured out your take home pay in this manner (as opposed to the "after-tax" figure, which can be misleading), it is now only necessary to estimate a spending plan for food. If you budget, as an example, $400 per month for food, your family then has a monthly disposable income of $1600. So, according to the rules we have set above, your debt payment obligations should be no more than 20%, or in this case, $320 per month. How much debt could you carry for $320 per month? As an example, if the debt had an average maturity of three years, $320 would be adequate to service about $10000.

Example of Yearly Debt Budgeting
Our second rule is quite strict in comparison to the first. Using the same income level above, your annual disposable income would be $19200. In this case, you should not carry more than 33% of this total, or approximately $6400.

Each example gives an excellent level of debt manageability, with one being more aggressive than the other. You may not be able to follow both rules, but following a stringent set of goals is crucial for freeing your self from debt. See Setting Goals here.

If you are having trouble keeping up with your debt, please contact us here for a free consultation.

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