Historically, carrying large amounts of debt was largely seen as a bad thing - and for the most part, it was and still is. Today, either through slick marketing or a change in the population’s attitude, it has become much more acceptable to carry larger amounts of debts, not to mention student loans.
But if you want to buy a home or a car, some amount of debt is normal. It’s rare to meet anyone that doesn’t have some type of debt. So, the question everyone must ask themselves is: How much debt is it okay for me to have?
Here are some debt to income ratio guidelines to keep in mind.
Credit Cards
Credit cards were largely created to make banks richer - okay, that’s not entirely true, but that is the way it has turned out. Visa was one of the original credit cards (some might argue that it was the first real credit card as we recognize them today). That first Visa card was created sometime in the 1950s and early 1960s. Banks mailed those early cards to customers that were thought to be safety risks for the bank. The intention was to help those good clients earn and build credit.
Today, the notion of building credit using a credit card remains the same. If you want to build credit, you have to have a credit card - but you also have to pay your monthly balance in full each and every month in order to retain that good credit. If you choose to carry a balance, your credit might suffer. So this leads us to the first acceptable form of debt: credit card debt.
- You must be able to pay your balance in full each month.
- You should not rely on credit cards to purchase things that you do not have the cash for.
- It is okay to carry a small credit card balance if it is paid each month.
PayDay and Other Types of Loans
These types of loans should always be your very last option. These are high-interest loans that keep people in debt. I understand that it can be really tough to make it through an entire month if you are paid on a monthly basis, or if your expenses outnumber the amount of money that you earn monthly.
Everyone knows that you should always attempt to live within your means, but there are times where a PayDay loan or other type of loan may seem enticing.
Do not rely on PayDay or other advanced payment or loan options unless you have a rock-solid plan to pay it back as quickly as possible. Never rely on these types of loans to buy stuff. That one is simple enough. Wait until you have the cash to buy what you want.
Housing Costs
It can cost a lot to run a household. The rule of thumb is not to let your housing costs exceed 30% of your income. That’s not easy to do, but this ratio will ensure that you are not living beyond your means. Housing costs can include:
- Anyone you employ (nanny, housekeeper, gardener, pool guy)
- Utility bills (electric, gas)
- Taxes
- Mortgage or rent costs
- Any other fees like HOA fees.
If you find that your house is costing you more than 30% of your income, try and cut back in other ways to balance that number out.
Money for You
Lastly, it is important that you save some money for a rainy day. You never know when you might lose your job or an emergency will arise. If you are unable to put money aside regularly, you might have too much debt. Work to pay off your existing debt first, and then work towards putting money aside regularly. You’ll be glad that you did!
