How Much Debt Is Too Much Debt?

Guess what my first answer to this question is. Go ahead. Guess.

Right… any consumer debt – that’s stuff on your credit card or line of credit that went towards anything you didn’t need – is too much debt.

On the “Life Pie” you can spend up to 15% for debt repayment (not including your car payments and your mortgage). To calculate what percentage of your income you’re spending on debt repayment, add up your monthly debt repayment amounts (not including your car payments and your mortgage), divide that by your monthly take home pay, and multiply it by 100.

If you’re spending $670 a month paying off your credit cards, student loans, line of credit, furniture loan, or whatever else, and you make $3100 net a month, your calculation would look like this:

670 ÷ 3100 x 100 = 21.6%

If you’re spending 15% or less of your monthly income paying off your debt then you’re okay. Not great, but not drowning. If you’re spending more than that, uh-oh!

The words “paying off” are important. If you’re spending 15% or more of your income just meeting your minimum monthly payments, then you’re in trouble and headed for a fall. Making just the minimum payments on credit cards means you’re gonna be in debt FOREVER and you’re going to pay GOBS of interest.

If you have a $3,000 balance on a credit card charging 14.98% interest, and pay a 2% minimum every month it will take 26 years to pay off your balance and cost you a total of $7,440 in interest. Yuck!

There are some other signs that you may be in over your head. If you find, for example, that you seem to have less and less money for things like food because you’re spending more and more money trying to keep up with your debt, that’s a bad sign. And if you keep dipping into your savings, keep trying to refinance, or have to take a payday advance loan, it’s a sign that you’re over-extended.

Another big clue: you keep hitting the ceiling on your credit cards. If as soon as you pay down balance, do a balance transfer to reduce your costs, or refinance in some other way, you’re right back to the limit on your credit, you’re in deep doo-doo.

Ditto if you can’t find two red cents to put into an emergency fund. No emergency fund means that the first time Old Man Trouble rears his ugly head, you’ll be right back using your credit to fill your financial gap. That’s no way to live.

And, finally, if you can’t sleep at night, if you toss and turn or awake in a cold sweat, you’re in trouble. Why are you doing this to yourself? Taking care of the problem is so much easier.

First, admit you have a problem. Say it out loud right now: “I have a problem with my debt.” If you aren’t prepared to admit you’re in trouble, no one can help you. If you aren’t prepared to add up the mess you’re in, you’re not ready for help yet. Quit your whining. If you want things to change, start by saying, “I have a problem with my debt.”

Second, start writing down every penny you spend. Whether you spend $1.25 for coffee or $600 on a fabulous new pair of shoes, write it down. This is how you become accountable for forfeiting your future in the name of an immediate pleasure. When you look over your list at night – yes, you have to look over the list every night – ask yourself why you’re really buying. Did you get a rush? Did you feel pleasure? How are you feeling now?

Third, switch from credit to cash. It’s way easier to charge something than it is to fork over cold, hard cash, particularly when you’re getting to the bottom of the jar.

Finally, commit to paying off your debt. Allocate a fixed amount to each debt, paying off the most expensive debt first while you make smaller payments on the other debts. Once your first debt is paid off, reallocate that money to your next most expensive debt. Keep going till you’re out of the hole.

Don’t have the money to make a dent in your debt? GET A JOB! Another job, a better job, I don’t care. MAKE MORE MONEY! Hey, you’re the one who went out spending money willy-nilly, without a thought to how you were ever going to pay your creditors back. The time has come to pay up. So suck it up, find a way to get out of debt and get your life back!

Staying out of consumer debt isn’t an impossible feat. It’s a matter of not spending more money than you make. It means not buying something when you don’t already have the money to pay for it. Life is expensive enough. Why would you add interest to the equation?

32 Responses to “How Much Debt Is Too Much Debt?”

  1. I have approximately $15000 left owing on a mortgage and car loan (combined). I have about $24000 in savings. I’m tempted to pay both off. Savings will build back up to original amount in about 7 months. If I pay both off, the amount I’d need in emergency funds would be less due to less expenses. But, I’d only have $9000 if a huge expense came up. On the mortgage, I’d only save about $300 in interest. On the car loan, significantly more. I have 2+ years owing on it. Suggestions?

  2. @Cas, I probably wouldn’t use my emergency fund to pay off the debt, just in case an emergency happens. I would aggressively get rid of that $15k, by sacrificing what you can. I paid off both my car loan and mortgage last December and I went el cheapo to pay it off as fast as I could.

    I am sure you will have it paid off in no time. Congrats on getting it down to $15k.

  3. CAS: Why does it have to be all or nothing? A $9000 emergency fund seems to give you pause (“only” $9000). One option could be to pay off the car loan first. You can then build up your emergency fund to a level that makes you feel comfortable. You can then decide what you’d like to do about the mortgage. Just a thought.

  4. Great advice, as usual. My only concern is I believe excluding a car payment from consumer debt is misleading. If you buy a car using credit it is a debt that will cost you a lot of interest. A car is something that needs to be planned for and saved for. Car maintenance, fuel and insurance are covered under the transportation part of a budget but if you choose to finance a car it is consumer debt, often a great big debt for a fancy car with many bells and whistles.

  5. If you really want to pay it down fast, I would say use half to pay it off (car loan completely and rest into mortgage). And the remainder is still 12K which ought to be plenty for say a new roof or new furnace etc. I’m assuming you are not managing multiple properties, have good job, good health etc.

    Good luck with your decision.

  6. I agree with Linda. I don’t see why car payments are being lumped in with a mortgage. The car starts depreciating as soon as you buy it and costs money to maintain. In my mind, it’s also consumer debt.

  7. I presently spend 33% of my net income on debt repayment – more than I pay in rent! I won’t lie, it completely sucks, but as Gail says (and I believe) it’s my own darn fault. On the plus side when I’m paid off in 18 months I can give myself a 33% raise.

  8. Paulie G that’s great you are on track to get it paid off! It sucks now but you will feel so much better once the debt is gone. I made sure all my credit card debt and student loans were paid off before going on mat leave and I am so glad I did that. Though I still have my car loan, I don’t think a car is consumer debt unless you are getting a fancy one that is more than you can really afford. When buying a car you need to make sure you can afford not only the payment, but the fuel and maintenance too. I had to replace my car shortly after graduating, my plan had been to make due with it for another year or so and save what I would be making in carpayments during that time but it was in bad shape and didn’t last more than a few months and I have to have a car to get to work, I live on a farm.

  9. My friend got so sick of her credit card debt (probably only a few thousand at most too) and she cut up the card! That way she could ONLY pay it down, she couldnt keep using it. In just a few months it was paid off and now she works solely on cash

    I also heard there was this study where people eating out spent 30% more when using a credit card vs cash! Interesting how our minds work, eh?

  10. I paid WAY too much interest when I was in debt. It seemed to take forever to chip away at it. It was such a relief to get it paid off this past summer.
    Never again!

  11. avatar BluenoserChick Says:
    November 19, 2012 at 10:56 am

    We currently have the following plan: 16.3% Savings (from net income, not including work pensions and RRSP contributions & matching), 19.5% on Debt (RRSP catch up loan, one CC each, and a LOC), 21.1% on housing, with next largest on Food (14.5% – three teen boys in the house). We’re comfortable with those numbers. No car payments, but probably next year.

  12. Cas-just another thought to consider-if you pay off the car loan with your savings, then take the amount of your car payment and addit to your mortgage to pay it off faster (assuming you can add that much without penalty of course). That way you still have a healthy EF and you’re getting to your goal quicker.

  13. Another well timed article. Just did my calculation and I am at 21% currently in debt repayment from my take home income. I have some work to do!

  14. How much debt is too much? How about any debt is too much! Yes I understand we can’t purchase the huge items in life without it. The only excuse I see is for a mortgage. Unless you plan to rent forever that is the only debt that is acceptable. Everything else is a choice. You chose to spend more than you could afford and therefore you spent too much. It is a hard line, but at least you don’t pay anyone else more than the item is worth. Interest on the red side of the ledger is a terrible thing it is worse than sandpaper for toilet paper. Interest on your black side of the ledger is a powerful thing. It is money for nothing. So in my mind any debt is unacceptable. There is no reason you should be paying a single cent of interest just because you can’t use the thing between your ears to figure out an alternate solution. Don’t buy your way out! Find your way out.

  15. While it’s good to be debt free, I don’t think consumer debt is that big a deal. We’re currently debt (and mortgage) free and are probably going to borrow around $100K for a want. Sure I could save for six years and pay cash for it or I can borrow the money now and have it today while paying for the next six years. If I was twenty, I might follow Gail’s advice about saving first for purchases, but since I’m on the wrong side of fifty I’ll have my toys now thank you.

  16. Our current Life Pie is:
    Housing………………..45.4% (s/b 35%)
    Transportation………….5.1% (s/b 15%)
    Life………………………22.8% (s/b 25%)
    Debt Repayment………….0% (s/b 15%)
    Savings/Investments….8.0% (s/b 10%)

    As you can see our housing costs are high, but we’re okay with that. We moved to a bigger house on a large property just last year, as my husband was paying $2,000/mth in rent for an industrial unit (he has his own construction business). So now we have his shop in our huge garage with a separate driveway and we put that money towards our house – our biggest investment.

    We nixed all our consumer debt a few years ago and will never go back to living on credit. Ever.

    I think what works for each family is different, but using Gail’s Life Pie is a very effective tool that everyone can follow.

  17. Oh and if you’re wondering why I don’t balance to 100% it’s because I leave a little bit each month (18.7%) as a buffer for unexpected expenses. Those expenses usually end up in the ‘Life’ category.

  18. I know someone who is $57,500 in debt, accumulated over five years.

    They got there by overspending $958 per month for 5 years (inc. principal and interest).

    To pay it BACK $57,500 at 9% interest starting now will cost $1,194 PER MONTH for the next five years.

    The result is that for the next 60 months they will have paid an additional FOURTEEN THOUSAND ONE HUNDRED AND SIXTEEN DOLLARS in interest on top of the $57,500.

    What a crazy consequence of being delusional about spending decisions you can’t afford at the time.

    “Debt” isn’t just another expense, it is so much worse than that.

  19. @Anita. Thanks for sharing. We are in similar boat as you. 0% for Debt Repayment as we have no consumer debt so I moved that 15% allotment over to mortgage prepayments instead. Every little bit helps to chip away at our massive mortgage.

    Thanks for all the tips everyone. Since we found Gail’s Blog we spend WAY LESS on eating out when we had to write down what we spent and track our receipts each week. I was shocked to see how much went out the door from just being unaware of what we were spending at restaurants. Huge immediate savings there. Thanks Gail!

  20. Hello All

    We are currently at 41% for debt repayment,
    however this includes an additional 1500 a month on debt on top of payments. As well in 3 months the last of the credit card and boyfriends loan will be paid off. It will not drop down the ratio since we will keep the amount the same and pay extra on other debt. We have paid off well over $10 000 in the last few months. This amount has not stopped us from being able to afford new ski equipment and etc this year.

    Most of our debt is leftover from school. No new consumer debt since we finished school. Had to purchase new vehicle though for the similar reason as C. Needed a new car shortly after graduating for work and no time to save up for one as it had died.

    Also our housing and life are well below the life pie percentages so I guess it all evens out in the end.

  21. @Casey
    I think I can vouch for your comment re: spending less when using cash as opposed to a credit card. I used to use my presidents choice credit card for all my groceries because I was keen to get all the points so that I could get more “free” groceries. However, a couple of months back I decided to switch to using cash only for groceries (as well as buying from the farmers market for fruit and veg rather than Loblaws). I have been amazed at how much I have saved using cash … I haven’t added it all up but I’m pretty sure it’s substantial … I used to spend easily $100 – 120 a week on groceries and now I spend around $50 – 60 a week on average.

    I still shop at Loblaws for some basics that I can’t get at the farmers market but I don’t use my credit card. What I have found is that I spend less using cash because it’s cash … I can see what it’s costing me. Whereas when I paid by credit card it was too easy to add an extra item (or 2 or 3) into my grocery basket because I was paying by credit – so I didn’t have to worry about not having the cash to pay for it. Plus, of course, if I used my credit card I got all those pc points!

    So now I don’t get any points for grocery shopping (I still use my pc card for some other purchases like health treatments) but I think I do get points for saving money!!

    Plus, after getting used to the initial change of habits, I find that I am cooking healthier food that tends to be in season and the fruit and vegetables and meat I buy are local, organic and taste delicious … I would never go back to buying fruit and veg in a supermarket – there’s no comparison with respect to taste.

    The only irritating thing from all this is the fact that the Loblaws receipts always tell me how many points I could have earned if I’d used my pc credit card to pay for the bill … but I ignore that information now because I know that if I had used my credit card I would have spent a lot more!

  22. @Cas,

    If they’d allow it, I’d look into something like Manulife One, where you’d still have your emergency savings, however in the meantime that money would be reflected on your debt, leaving you with zero interest charged each month while still making the regular payments.

    You’d be just the kind of customer they’d hate to have.. while your savings fund stays in tack, and works for you.

  23. @K,

    Out of nowhere we went from substantial savings in the bank to 75K in cc debt. An unexpected accident (of course, who has an accident on purpose) that not only took the seriously injured higher income spouse out of work, the healthy spouse needed to leave work to take care of the seriously injured other. As bad as it seems, things could have been a heck of a lot worse if we had bad credit. It’s going to take us 42 months to payoff, however if we had bad credit – things would have been much more dire. – So for those who judge others with what seems to them to be insane debt, remember, you don’t know the hows and whys, and need to refrain until you’ve spent a day in the shoes of others. @Alexandra, “only” $9000 is only, $9000, while it might seem like a lot, we had three times that amount in an emergency fund, and if your emergency turns out to be catastrophic…$9,000 won’t last long at all.

  24. I would consider not having savings and an EF as “debt” too since even if you don’t owe any $, you’re just one catastrophe away from being in debt again.

  25. Thanks so much Gail, once again for an excellent write up! You did focus on consumer debt, which I agree, is the worst kind of all that anybody could carry. But I urge people to remember that if you buy a home and you can’t afford it (even if you’ll get approved for it) – that’s NOT good debt! And I’m a mortgage broker!

    I urge people to do their calculations just as you showed, and know really where they stand, and how much of their money is going towards debt repayment – no matter what kind of debt t is. I realize that debt repayment and housing costs are two different “categories” and therefore have different percentages. But you must add it all up and put it altogether. Otherwise, that fancy home you’re living in could be the very worst debt that you have.

  26. Thanks everyone for your advice! Think I’ll keep doing what we’re doing. Putting extra money to the car loan, and then the mortgage. It’s just the original goal was to be debt free at 40. Then, at 40, we bought an RV, went on a big trip at Christmas and sent our daughter to Europe for a week. So, I’m heading now for 42, and want the debt gone! Not that I regret our choices. And we didn’t add to our debt, everything was paid in cash. But those extra payments didn’t happen. Regardless, we’re debt free in about 8 months. Just by making regular payments and a lump sum pay off on the car loan. I was just thinking that if we didn’t have the mortgage, it’d free up more money to pay the car loan. Car loan payments aren’t as big, so freeing up those, yes, save a lot in interest, but not in my pocket immediately. Hoping we’ll get everything paid off by March, maybe sooner with extra payments. Plus build up our savings further. As Jeff said, you really don’t know what the future will bring.

  27. Hi:)

    What percentage of your monthly income paying off your debt do you consider being good? You mention “If you’re spending 15% or less of your monthly income paying off your debt then you’re okay. Not great, but not drowning”

  28. Very good and insightful discussion today; thanks to everyone who has an opinion. Sometimes I need to look at my situation through other eyes to realize I am on track and doing well. Not perfect, but not drowning either.

    @Paulie J, I like your sense of the world! It’s not fun when you pay more toward your debt than your rent but right now that’s your reality. And giving yourself a 33% raise-I’d like to see anyone match that! Cheers to you and stay on your path!

    I don’t own a home and don’t know that I ever will. I am single, independent, and renting. It’s okay for me, considering the downsizing and re-organizing that happens in my work (I work in Health Care/Insurance and live in the States). For me, renting just makes more sense at the moment. I am comforted at times by not having a mortgage; other times I think I should own.

    However, it all boils back down to my pie & Gail’s guidelines. And when I look at that pie, I’m where I ought to be. For now. I don’t wake up in a cold sweat anymore, and I think a mortgage might put me right back there!!!

  29. We had over $27,000 in CC debt in 2010. We have $0 now. I agree with Gail and I am so relieved that we are out of it. My hours have been cut in half (30 hrs to 15 hrs/wk) since Sept. It’s likely to be like this until Feb/13 and I don’t have alot of options for other work (I am looking). We are managing just fine. I have had to make some adjustments to our regular budget (extra money that I was building to pay down our car loan has been decreased greatly) and my Christmas budget (reduced significantly) and plans have changed. But we will manage.

  30. It is an unfortunate reality that people spend more than they make and put most of that spending on credit cards and lines of credit. I personally, don’t get it. Growing up, I have seen way too many people who looked “stuff rich” but were stressed out and financially poor. I knew back then that I would never do that to myself. My husband and I have a modest mortgage to pay off and that is it. No credit card debt, no line of credit and no vehicle payment. We have owned our own business for almost 10 years now. We are not wealthy by any stretch, but we aren’t financially strapped either and for that reason, we can sleep at night.

  31. i have just found out my husband is in debit for over 130 000which he has keep from me for the past 3 years do to a failing business! i dont know what to do to stay or to leave he has obvioulsly lied over and over i dont see how we can recover this debit he seems to think it is doable i dont!!!

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