Everybody is different and none of us are in the exact same situation. This makes it hard to find a normal amount of debt that is okay to have and an amount that is too much. Here is a debt checklist to help you determine whether you have too much debt or not.
1. Credit Card Debt
- If you cannot pay off your credit card balance, in full this money or at least by the end of next month, then you have too much credit card debt. Did you know that if you carry a balance of more than 25% of your credit limit it actually hurts your credit? This is true and it does not even matter if you pay your bill on time or not. It will still drop your credit score.
- Credit card debt is unsecured and considered bad debt. It is used for things we do not need and usually can very much live without. This is the type of debt that you need to be very careful with and make sure you can pay off your balance each month.
2. Mortgage and Home Debt
- Your mortgage, utilities, home insurance, taxes, and home upkeep should all be lumped into one category and should never exceed 30% of your net income. When your mortgage and home bills get to the point that they are costing you almost half your monthly income or more you will begin to have trouble and you are on your way to a very deep hole of debt.
- Be very careful when you refinance and when you purchase because lenders will allow your Debt to income ratio to get above 50% and this is very bad for you because it does not leave you room to save and to deal with unexpected expenses.
3. Car debt
- Car debt is not a big deal as long as it is not consuming a large chunk of your income. There is no reason for someone that only brings home $2,000 a month to have a $300 car payment on a car that has an insurance rate that costs them another $150 a month for insurance. That is way too much to be spending on your car. You should be managing a payment around 15% of your income or less. If you are not, then you should reconsider your transportation options.
4. Entertainment expenses
- This is going to include any alcohol, dining out, movies, concerts, and anything else you do in your free time. This needs to be a part of your life and your budget, but should never exceed more than 10% of your income. If you are not saving at least 10% of your income, then your entertainment needs to be cut to make sure you are saving. There are many free things you can do if you get creative and you look around your city.
5. Savings
- If you are unable to save at least 10% of your income, then you are carrying too much debt and need to use the debt checklist to eliminate whatever is causing you to waste your money. Savings will bail you out when things come up out of the blue. This will keep you from going into debt over something that you should be able to handle.
