No one plans to take on too much debt. Unfortunately, it can be easy to gradually get in over your head. One month, you fund a beach vacation on your credit card. A few months later, you purchase a laptop. Then, your car transmission goes, and before you know it, you’re in deep. But knowing how much is “too much” for your financial situation may help you avoid digging a hole that might take you years to climb out of.
How debt happens. Sometimes debt arises unexpectedly due to emergency spending, a job loss, medical expenses or unanticipated home or car repairs. But excessive debt can also result from impulse purchases or a desire to keep up with the Joneses. It’s nearly impossible to set limits on the former type of debt, but you can control the latter. Also, note that we’re mostly referring to credit card debt as opposed to mortgages, car payments or student loans.
Debt’s damage. It costs money to assume and maintain debt. You’ll likely spend a pretty penny to finance your credit card balances through the interest you pay your lender. And when you make only the monthly minimum payments, those charges, along with an occasional late fee, can add up fast. And the damage isn’t necessarily limited to financial impacts. Debt can cause stress, exacerbate marital problems and damage your credit. Ultimately, debt can even derail your retirement plans. When you take on a lot of debt, you’re likely contributing less to your retirement plan, and the money you don’t invest doesn’t have the opportunity to grow over time.
Setting limits. Every situation is different, and there are no hard-and-fast rules. But consider the 28/36 rule as a good place to start. This is a guideline many lenders use when evaluating mortgage applications. It stipulates that no more than 28% of gross monthly income should be spent on total housing expenses, and no more than 36% on all debt, including credit cards.
Monitoring debt: Once you have a sense of how much debt is too much, the challenge is trying not to cross the line. To do that, you need to monitor your debt situation on a regular basis — because it’s hard to control what you don’t track. Fortunately, numerous online and mobile tools are available to help you do just that. Some examples include Mint, Credit Report Card and Tally. These apps can help you consolidate and organize all of your debt tracking in one place. You can also use a simple spreadsheet to list all your debts according to lender, total balance and interest rate.
If you’re concerned about the impact your debt may have on your retirement readiness, talk to your WellCents financial professional to review your financial situation, including your current debt. Together, you can come up with a plan to dig out of debt once and for all.