Debt is a hydra-headed issue that keeps many people stuck in a bottomless financial pit. For perspective, the total credit card debt for U.S. consumers has crossed the $1 trillion milestone. Student loan debt has been increasing steadily for every demographic since 2004. And a 2017 survey showed that only 34 percent of middle-income Baby Boomers aged 52 to 74 years old will be able to retire without debt wiping off their retirement savings.
America seems to have a permissive culture of debt. The availability of financing makes it easy for many to spend money they don’t have on stuff they don’t need. The more unfortunate thing about debt is that it doesn’t happen overnight. Instead, it creeps up on you stealthily until its ravages all of your finances. If you are feeling helpless on how to manage your debt, you may want to seek help in debt counseling programs. If you’d rather go at it alone, this piece provides actionable insight to know how much debt is too much. That way you can start taking proactive steps to get your finances back in order.
You are living paycheck to paycheck
The first sign that you might be neck deep in debt is when you are living from paycheck to paycheck. Trying to stretch your income to cover expenses from one payday to the next suggests that you probably don’t have a buffer cash or emergency savings fund. Hence, in the event of an unexpected financial commitment, you’ll most likely need to borrow money or charge the expense to a credit card. The worst part of living from paycheck to paycheck is that you won’t have any savings, you might not be able to invest, and your financial well-being is dependent on your ability to keep your job.
Your loan payment cost more than your rent/mortgage
Ideally, your living expense should not be more than 30 percent of your income. If your debt payments take a larger percentage of your income than your housing payment, you are throwing a double mortgage down the drain without earning home equity in return. Of course, your debt payment can be higher than your mortgage if you are trying to deal with high-interest debt by paying it off – but that’s for a predefined financial objective. A situation in which your debt payment is consistently more than your rent/mortgage will land you in financial ruin. The last thing you want is to not have money left over for other important things.
Also Read: The Psychological Effects of Being in Debt
Your balances are increasing instead of reducing
The third sign you are already wallowing in debt is when you observe that you are scarcely paying down debt. Take the time to track your finances. You can easily know if you’re paying down debt and estimate how long it will take to become debt free. The problem is that many people don’t take the time and effort to track their finances. You pay your bills, pay the balances on your credit cards, and put whatever is left (if any) into savings. There is already in too much debt if you notice your debt balance remains unchanged or is creeping up.
You have a negative net worth
Your net worth is a financial calculation that subtracts your liabilities (the things you owe) from your assets (the things you own). Whatever is left over after the calculation is a decent indicator of your financial well-being. Ideally, you should have some money left over after your liabilities have been deducted from your assets (positive net worth). In some cases, your net worth might be zero, in which case your assets are equal to the size of your liabilities – and you should be worried. However, when the value of your liabilities are more than the value of your assets (negative net worth), you are already in a financial mess.
