How Much Debt Is Too Much Debt?
Posted by Gail | Filed under Debt Traps
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?