Do I Have Too Much Debt?

    Most people have some level of debt, which may include a combination of mortgages, student loans, personal loans and credit card bills. However, if you have too much it can lead to all sorts of issues

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    For American households, debt has become a way of life and in some of those houses, the figures are staggering.

    Household debt (mortgage + home equity loans + credit cards + student loans + auto loans) in the United States reached $12.58 trillion at the end of 2016, an astonishing rise of $460 billion for the year. The typical American household carries an average debt of $134,643.

    Whether it’s mortgages ($176,222 average debt), student loans ($49,905), auto loans ($28,948) or credit card debt ($16,748), money issues are rampant through every age group.

    The Federal Reserve issues a Survey of Consumer Finances every three years (the 2016 study is due out in late 2017). Using the most current data from 2013, here is the total age-group breakdown of the average figures for American households that had debt:

    • Under-35 — $82,500
    • 35-44 — $152,400
    • 45-54 — $150,500
    • 55-64 — $131,900
    • 65-74 — $108,700
    • 75-and-over — $57,500.

    America’s median income has risen 28% since 2003, but the cost of living has increased 30% during that span. Meanwhile, medical costs are up by 57%, while food and beverage prices have risen 36%.

    Ric Edelman, a syndicated radio host who has written eight books on personal finance, said at least part of the American debt plight rests with the lack of financial education.

    "Once you show people how money works, they almost instantaneously change their behaviors," Edelman said. "There are a few people who are spendthrifts, who are psychologically in a place where they spend their money and can’t control themselves, but overall, people who spend money poorly simply don’t know what they’re doing is bad."

    "That lack of education, I feel, is one of the biggest contributors to the rising debt we have in this country."

    If you are a typical American, you have some debt, probably lots of it. And you probably wonder: Where does my situation stack up?

    Debt To Income Ratio

    Do you have too much debt?

    There’s no universal answer to that question. Some people are risk averse. Others have a large pool of resources and can handle eye-popping bills.

    But there are some generalities that work for most people. Let’s start with the Debt to Income Ratio.

    To determine your debt ratio, add all your monthly debt payments (that includes credit card bills, auto loans, student loans and personal loans, but NOT your mortgage payment).

    Divide that figure by your monthly take-home income, which is your gross income minus taxes and other deductions).

    The resulting figure should be 0.10 or lower. That means your debts should account for 10% (or less) of your income. If it’s a larger figure, bells should be clanging in your head.

    Now another calculation.

    This time, include your mortgage payment in the monthly debt costs. Including mortgage, your debts should be 36% (or less) of your monthly take-home income. Again, if the figure is larger, it’s a warning that you likely have more debt than you can manage.

    Potential fixes? The simple answer is to a) cut expenses; and b) increase income.

    Unfortunately, it may take a while for adopt either habit.

    "These are habits that are best established early in your life, but I see young people as being a very vulnerable group," said George Washington University professor Annamaria Lusardi, who is considered one of the world’s foremost experts on debt. “We have a $1.3 trillion student loan debt in this country and we also have a huge part of the population that doesn’t grasp the concept of compound interest.

    “These young people start their adult life in debt. They are highly leveraged. It leads to mismanagement of their finances, which perpetuates the debt problem we have today.’’

    Warning Signs

    Unfortunately, there are no alarms going off on your smart phone that scream: “Warning! Warning! Too much debt!”

    There are, however, some tell-tale examples that your debts have climbed too high:

    •  Your consumer debts (credit cards, medical bills, personal loans) total half or more of your income.
    • Creditors are calling to collect payments.
    • You’re making only minimum payments on monthly credit card bills. What’s wrong with that? Plenty. It can take years to pay off a balance — even with a small debt — and the total interest could add up to more than the original debt.
    • Your credit cards are maxed out.
    • You have been rejected for new lines of credit. Either you have too much debt or your recent credit history is damaged. Or both.
    • You don’t have an emergency fund. Financial advisors universally recommend liquid funds equivalent to three to six months of your income in case of a financial emergency, such as losing your job or unexpected medical bills.
    • Your bank account is typically at (or below) $0.
    • After paying bills, there’s no money for basic extras, such as seeing a movie or ordering food.
    • You have taken advances on your paychecks.
    • You are paying bills late because there isn’t enough money in your account to cover those costs.
    • You use one loan or credit card to pay off another loan or to pay typical monthly bills. Bad strategy. It shifts your debt. Everyone’s goal should be to REDUCE the total amount of debt, not add to it.

    Seeking Help

    People like to believe they can control their finances, but sometimes, it’s best to utilize a credit counselor from a non-profit agency. Things need to be sorted out and bills consolidated.

    When has it reached that stage? Here are some clues:

    • You’re adding debt every month. The balance is growing and spreading like a virus.
    • You’re living paycheck to paycheck. When debt payments consume your income and you’re down to your last dollar, the situation has gone on long enough.
    • Marriage doubles the problem. When you suddenly owe twice as much because your new husband or wife brings debt into the union, it’s an issue.
    • Debt payments cost more than your home. The so-called “double mortgage’’ is no way to live.
    • Your net worth is less than zero. It’s discouraging if your net worth is actually a negative.
    • Your credit score suffers. You can’t jeopardize your credit score, which is essential when buying a house, taking out an auto loan or borrowing money to start a business.

    Extreme Measures

    Sometimes, things go from bad to worse. If any of these scenarios sound familiar, your situation needs to be addressed immediately.

    •  You’re not sure how much you owe. Ignorance or fear will not make the debt go away.
    • You don’t answer the phone because it might be a bill collector. At this stage, you’re probably losing sleep over your finances. It’s a sign your debt is officially out of control.
    • Your savings have been drained. You have put yourself in a precarious situation and it’s time to confront the problem.
    • You have turned to drugs or alcohol. If it has spiraled out of control, you may need to seek clinical treatment before you can address the financial woes.
    • You hide spending habits from loved ones. If you can’t be honest with your family, chances are great that your debt has become unmanageable.

    More Warnings

    Here are some debts that should be avoided — period.

    • Payday loans
    • Loans that offer “no credit check"
    • Title loans
    • Rent to own schemes
    • Any debt that requires you to pay two or three times more than you borrowed.

    Understanding Debt

    To most people, debt represents a four-letter word. They don’t want anything to do with it because it helps them live a disciplined, debt-free existence.

    That is one extreme.

    Here’s another: the risk-takers, the people who love to use other people’s money to their advantage. Occasionally, it can result in big losses, but it’s also a way to make big gains.

    To be sure, most Americans reside somewhere near the middle. We are cognizant that debt sometimes is used to build wealth, but aware it also can destroy a comfortable lifestyle.

    It’s all in how you view the world and how you take advantage of opportunities.

    • To some, student loans are a bridge to higher education, a chance to dramatically boost earning power. To others, student loans are an anvil, requiring a lifetime of payments that delay (or prevent) the purchase of a home, having a family or saving for retirement.
    • To some, mortgages build equity for the future, while providing a place to call home. To others, mortgages are a huge debt that could end up in foreclosure.
    • To some, auto loans allow us to purchase safe, reliable transportation. To others, auto loans add a rapidly depreciating asset to our pile of debt.
    • To some, business loans can help us launch or expand a company. To others, business loans jeopardize the enterprise, zap the company’s wealth and potentially put some people out of work.

    Sometimes, taking on debt is the difference between recognizing opportunity and being too scared to move forward.

    Learning Discipline

    Avoiding too much debt really revolves around personal responsibility. Remember, lenders are usually willing to give you far more money than you can comfortably repay. Setting limits is up to you.

    A good place to start is the 50/30/20 guideline advocated by U.S. Sen. Elizabeth Warren, a bankruptcy expert, and her daughter Amelia Warren Tyagi in their book, “All Your Worth.’’

    The 50 stands for limiting your “must have’’ expenses — shelter, utilities, food, transportation, insurance, child care and minimum loan payments — to 50% of your after-tax income. And here’s another gauge for debt. If a new debt payment keeps you under the 50% mark, you can probably afford it. This can be a tough one in major cities, where typically nearly half of your after-tax income is needed for the mortgage or rent.

    The 30 is for your wants. Use 30% of your after-tax income for “luxuries,’’ such as eating out and vacations.

    The 20 is the remaining 20% of after-tax income that should be used for saving and paying down debt.

    It can all be very daunting, trying to stay in these ranges, trying to save for the future while paying off the past.

    But it can also give you a guide to evaluate your debt on all levels.

    How Much Total Debt Load?

    Do you have typical debt for your age and income level? That’s another difficult question … followed by a series of questions.

    Where’s your stage of life?

    What are your spending and saving habits?

    What’s the stability of your job and your career prospects?

    What financial obligations do you have?

    Another ratio to consider when calculating a reasonable debt load is the 28/36 Rule.

    Households should spend no more than 28% of their gross income on housing expenses (mortgage payments, home insurance, property taxes and condo fees). That means a maximum of 36% for total debt service (housing expenses plus other debt, such as car loans and credit cards).

    Let’s say you earn $50,000 per year. By following the 28/36 Rule, your housing expenses should not exceed $14,000 annually (approximately $1,167 per month). Other debt service payments should not exceed $4,000 annually (approximately $333 per month).

    This translates into how much house you can afford.

    Assuming you get a 30-year fixed rate mortgage at a 4% interest rate, your monthly mortgage payments are a maximum of $900. That leaves about $267 per month for insurance, property taxes and other housing expenses.

    So, the maximum mortgage debt you can take on is approximately $188,500.

    If you have no credit card debt or other liabilities, you can take on a car loan of about $17,500 (5% interest rate, repayable over five years).

    How would this translate into everyday expenses?

    • Your monthly take-home pay would be $3,125 (net monthly income of $4,167 minus an approximate 25% taken away by income tax and other deductions).
    • Take away monthly housing expenses of $1,167.
    • Take away other monthly debt service of $333.
    • You are left with $1,625 for the month.

    All of this, of course, could be changed by different interest rates and an individual’s comfort level with debt. The 28/36 Rule at least gives you a baseline example of what to expect.

    How Much Is Too Much?

    There are common fixed expenses for nearly every American household that can’t be avoided. It’s impossible to avoid mortgage/rent; auto; credit cards and, in many cases, student loans.

    The question that should be answered in each home is what the spending limit should be in each area? Here are some guidelines from financial experts.

    Most mortgages fall in the range of 31% to 36% of total income, including principal, interest, taxes, insurance and association fees. In some cases, usually in larger cities, it can push upward of 45% to 50%.

    Those limits might need adjustment in times when regular pay raises are not as common as the past. Plus, past generations paid less for health care and college. Due to shorter lifespans and greater pensions, there wasn’t as much pressure to save for retirement.

    So, what is reasonable? By capping housing costs at 25% of your income, it will give you flexibility in other areas. It should also allow you to have the house paid off by retirement age. It’s advantageous to choose a 15-year mortgage or perhaps a 20-year deal and stick with it, even if the interest rates drop.

    Ideally, college students won’t borrow more for a degree than they expect to make during their first year out of school. Parents shouldn’t borrow at all, so they don’t interfere with retirement savings. Aim for 10% of your gross income and try to pay off the student loan expense as soon as possible.

    Automobiles are not a good investment. Car payments should be no more than 5% to 10% of gross monthly income. Shoot for a four-year loan and a 20% down payment to maximize your flexibility.

    This usually becomes the area of most concern. The smartest goal is to shoot for zero. Uh-huh. We said it. Zero percent!

    By using credit cards as a convenience, not to finance things you really can’t afford, life becomes so much more manageable. Try to pay those balances in full every month. It can be done with discipline and reasonable spending expectations. At the very least, make more than the minimum payment and don’t saddle yourself with more unneeded purchases.

    "Modern life can be difficult, especially for young people", Houston financial advisor Joseph Birkofer said. "Most starting jobs don’t get anywhere near covering the expenses of today."

    "Everyone is expected to have a $300 cell phone. Add in your Internet bill, the cable, the rent, the food … and pretty soon most entry level jobs paying less than $40,000 are just not enough."

    "People choose debt instead of going without, so the problem keeps growing. At some point, I think you do have to say that enough is enough."

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    Bill Fay
    Staff Writer

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at


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