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
Example of Yearly
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.