Do you know how much debt is too much? George S. Clason, the author of “The Richest Man in Babylon” said “All men are born with more desire than they can justify.” Maybe it’s time to evaluate your debt. How can you tell what percentage of your debt should be for home expenses or what percentage of your monthly income should go for debt payments?
Almost everyone knows credit card debt is almost always the most expensive, but do you look at the outstanding balance on your statement or just the minimum payment? Late or skipped payments lower your credit score and make it more expensive to borrow in the future.
Do a quarterly “check up” on your debt level. At the end of each quarter, add all your outstanding balances including credit cards, home equity loans, mortgage, student loans, etc. A common rule of thumb is to divide your total debt balance (say it’s $100,000 for example) by your annual gross income ($40,000 for this example). In this case your percentage is 25. A common rule of thumb is to keep this figure below 30%.
Determine the percentage of your debt that is for your home expenses. A general rule of thumb is that no more than 28% of your gross monthly income should go to house-related debt. Remember to include include property taxes, insurance, and especially home equity loans.
Calculate the amount of your monthly debt payments. Your total monthly debt payments for house, credit cards, car payments, student loans, etc., should not exceed 36% of your gross monthly income.
Stop unwanted credit card offers. If you have a good credit rating, you will receive numerous offers to open new credit card accounts. If you’re tired of all this junk mail (which should be shredded rather than thrown away!) or you do not want to be tempted, you can remove your name from credit card marketing lists by calling 888-5-OPTOUT or online at www.OPTOUTPrescreen.com. This only applies for “pre-approved” offers and is valid for five years.
In today’s economy you could be in for some rude shocks, so do the simple calculations above to determine if you’re in a safe debt range and address your debts accordingly. As Francis Bacon said “If money be not thy servant, it will be thy master.”