Most individuals hear or see the word ‘debt’ and cringe. The fear of debt is very common and understandably so because debt is easy to obtain and can negatively impact a variety of things and can also be very difficult to overcome. Debt can be accumulated by swiping credit cards, obtaining loans, having payments on a variety of things, and not being able to keep up with the payments on any of them. It is easy for people to find themselves in debt. However, debt is definitely something that can be overturned depending on whether or not you are able to handle it. Keep reading for information on debt you can handle.
Debt: The Easily-Attainable Monster
You are in your favorite store ready to purchase your merchandise. Your cashier rings you up and gives you your total. Then you recognize a common question asked nearly every time you make a purchase at the store: “are you interested in opening a new credit card with us?” At first, you may be hesitant to do so, but then the cashier adds to her question that with a new card, you are eligible to receive 20% off of your current purchase if you use that card today. This promotion sounds too good to be true, but to get that 20% discount, you elect to open the new line of credit. This took all of 15 minutes to convince you to get a new credit card. Just that easy is it for an individual to start the build-up of debt.
Between the years of 2005 and 2008, the debt of Americans was approximately $960 billion. Although the amount has decreased in the years after, the figure is still at an alarming level. This high number is attributed to the easy ability for individuals to receive credit and loans. Perfectly schemed advertising of new credit or lowered qualifications to obtain new credit has been the driving force behind the debt of the country. However, there are tips to consider when it is time to consider the debt you can handle.
Tip 1: Spend When Necessary
When considering debt you can handle, only participate in spending when it is absolutely necessary. What you borrow and what you purchase with that borrowed money is your decision. Choose not to use your credit card to make large purchases you cannot afford to repay. Try not to obtain loans on which you will not be able to keep up the payments. If you must open new credit lines or take out new loans, make sure they are all necessary. The only debts you need are necessary debts.
Tip 2: Proportion Your Debt in 3 Financial Categories
When considering debt you can handle, consider placing special attention on three main aspects of your finances:
- Your income—income is a huge factor in handling debt, so making sure you have steady income is important.
- Your job—of course, if you are a retired individual, this would not apply to you. However, for everyone else, job security is not a guarantee especially in today’s job market. Jobs are constantly relocated or laying off employees in an effort to save money.
- Your savings—money put up has savings will come in handy in case of an emergency, like medical obligations that require payment, job loss, or a natural disaster that causes for financial obligations. Having extra money is a beneficial tactic when handling debt.
Tip 3: Rate Your Income and Savings to Determine Your Current Situation
When considering debt you can handle, consider placing your income and your savings on a rating scale to determine how much debt you are able to manage. Below is an example of the rating scale that was previously discussed:
Rate your level of income on a scale of 1 to 10 (1-low; 5-high): Rate = 4
Rate your level of savings on a scale of 1 to 10 (1-low; 5-high): Rate = 2
Total Rating = 6
Tip 4: Determine How Much Of Your Monthly Income Should Cover Your Debt
When considering debt you can handle, calculate what is known as your discretionary income. Discretionary income can be used for investing, saving, discretionary expenses, or repaying interest on loans. This figured is determined by your spending. Do not include your current payments toward debts. Below is an example of this calculation:
Total monthly income = $4,000
Monthly expenses = $2,000
Discretionary income = $2,000
Tip 5: Calculate an Estimated Personal Debt
When considering debt you can handle, it is wise to estimate your personal debts redline. This calculation will give you an estimated percentage of the amount of income you should use on handling your debt. Below is an example of this estimation:
Reminder: your rating was a 6 and discretionary income was $2,000.
| Guidelines for Repayment (maximum % of income to use for repayment each month) |
Total Rating |
|
10% |
2 |
|
15% |
3-4 |
|
20% |
5-6 |
|
30% |
7-8 |
|
40% |
9-10 |
$2000 (discretionary income) x 20% = $400 (used monthly to repay debt)
According to your numbers and the above table, your debt redline is reached when you find yourself spending 20% of your discretionary income on debt repayment. You should keep your debt payments below $400 a month. Your redline limit can move if you are able to monitor your debt repayments efficiently.
In conclusion, when considering debt you can handle, it is important to keep in mind your finances and savings, as well as your ability to handle monthly payments. Do what is necessary to handle your debt so that you can live in financial security and freedom.