Debt Management – Breaking Down Your Debt to Income Ratios
Just about everyone needs to take out debt to get started in life, but there seems to be very little guidance on how much debt a person should take out. Plenty of people have heard the adage, ”don’t borrow what you can’t afford to pay back”, but it can be difficult to know how much it’s possible to pay back.
Fortunately, financial advisers and budgeting experts have studied this question and developed some basic guideline for how much a person would spend on various loans.
Mortgage – 25% to 33% of your income
Ideally, your total housing expenses shouldn’t eat up more than a third of your paycheck. That includes insurance, tax, and maintenance. Fortunately, many banks consider this rule when making a determination of how much to loan someone for a home, so few people find themselves with unaffordable homes unless they have experienced a job loss or other personal tragedy.
Transportation – 10% or less of your income
Your car payment, gas costs, and maintenance should take up less than one tenth of your monthly income. It probably won’t surprise many people to learn that this is the most common loan “rule” that is broken. It can be hard to find a car with a payment that low, especially when a person is just starting out. Consider a vehicle with fewer options, and don’t trade in a car as soon as it’s paid off.
Student Loans – 10% or less of your income
Recent legislation now makes it possible for former students to cap their payments at ten percent of their current income. This rule was based on the financial advise of many economists who determined that people paying more than this amount delayed buying homes and cars in order to service their student loan debt.
This category is viewed as discretionary spending, meaning that this debt is seen as money spent on things that weren’t needed. Of course, many people with debt know they accumulated it from medical bills, car repairs, or other things they had to buy. Nonetheless, if you are spending more than one fifth of your monthly income on “other” loans, it’s time to get help with your bills. Refinancing, debt settlement, or just working harder to get out from these loans is necessary to keep yourself out of financial trouble.