Should You Limit Your Debt to 10%?
As more people become concerned with their personal finances, many financial experts have started publishing “ideal budgets”. These budgets are meant to guide consumers through the process of building a spending a plan by directing them to how much they should spend in each category. While the amounts vary, almost everyone agrees that debt repayment (not including a mortgage or car loan) should be less than 10% of your budget.
To many people who are struggling with student loans, credit cards, and personal loans, limiting debt payment to less than 10% of their net income can be a tall order. A typical American family that makes $60,000 a year would need to spend less than $500 a month on their debt.
It’s important to read the explanation that these financial experts give along with this figure, however. To start, many of these sample budgets use the 10% number as the minimum amount that a family or individual needs to pay on their debt. Considering that a $500 minimum monthly payment represents about $ 25,000 in consumer debt, it makes sense that financial advisors would be leary of a person taking on so much debt with no assets to show for it. Essentially, the 10% number limits a person from borrowing more than half their yearly salary in unsecured debt.
In many cases, however, borrowers can’t control how much debt they have. Many people have student loans from an education that they thought would pay for itself in a matter of months, not years. Other people have credit card bills from medical procedures that they had no other choice but to put on credit. Still others have used personal loans to get them through periods of unemployment.
If you are spending more than 10% of your monthly income after taxes on your minimum debt payments, then you need to take steps to lower your bills. A debt consolidation can be a good solution for many people. These loans pay off all of your existing debt and replaces the old loans with a single, low interest loan. Debt consolidation loans offer lower monthly payments to their borrowers, giving you the ability to get your debt under control.
<p data-sp-element=”content”>Even if you’re not having trouble making your minimum debt payments, having such as high level of debt puts you in danger of having big money problems down the road. If you deal with the debt now, when times are good, you’ll be able to build up your savings and be prepared for when things get rough.