How much debt is too much?

Debt is often crippling for Tennessee families. According to a recent report, on average, Tennesseans have more debt than they earn. That is, residents of the Volunteer State make roughly $52,400 per year while owing 108% of their incomes to debt.

As you likely know, debt is often part of life. Unless you have limitless wealth, you probably need to take on some debt for attending school, paying medical expenses or living in your home. Still, too much debt may complicate your financial future. How much debt is too much, though?

Basic math 

Even though your spending habits may not be exactly the same as your family members’ or friends’, debt affects most individuals similarly. That is, you may experience anxiety, sadness or even depression if you have too many financial obligations you must meet. To determine how much debt you can afford, though, you can rely on basic math to determine your debt-to-income ratio.

Before you calculate your debt-to-income ratio, you must understand a couple terms. First, your recurring debt is everything you owe on a monthly basis. Consider your mortgage or rent, car payment, credit card balances, student loans and other obligations when determining your recurring debt. You also must determine your gross monthly income. Put simply, this amount is what you make before taxes and other deductions.

Once you determine your recurring debt and gross monthly income, you are ready to calculate your debt-to-income ratio. The math is simple: Divide your recurring debt by your gross monthly income. Then, move the decimal a couple places to the left to turn your calculation into a percentage.

Managed debt 

While there is nothing wrong with having some debt, you probably do not want to acquire too much of it. Generally, financial advisors believe a debt-to-income ratio above 20% is too high. If your ratio climbs higher than 40%, though, you may have difficulty obtaining a mortgage or other types of loans. Of course, if you must pay more on outstanding debt each month than you earn, you can neither keep your creditors happy nor effectively provide for yourself and your family.

If you have too much debt, you may dread answering the phone. You do not, however, have to let your debt situation ruin your life. By understanding how much debt is too much, you can better plan for a successful financial future.