If you’re like many Americans, you carry at least a little bit of debt from month to month. But that amount can grow or shrink each month, depending on your spending and payment habits. How much might be the right amount for you? And how can you know if your debt is running hot? A traditional rule of thumb in the finance world suggests that your monthly debt payments, excluding your mortgage, shouldn’t exceed 20 percent of your take-home pay. This is a good barometer, but it doesn’t address the other aspects of indebtedness that could signal you’re already in over your head.
What else should you look for?
A telltale sign that you’re suddenly dealing with too much debt is finding yourself in the minimum payment trap. Due to their financial situations, many people are only able to make the minimum required payment towards their credit card bills. This is referred to as a trap because it keeps you in debt for an extended period of time: that means paying more in interest over the long run.
Your credit card payments are applied to the outstanding balance and accrued interest. The lion’s share goes toward interest, so making only the minimum payment perpetuates a cycle of debt. If you can’t pay your credit card debt in full monthly, you should do your very best to send more than the minimum payment. Even an additional $5 or $10 can make a difference.
The minimum payment trap usually results from not having much room in your budget. This is another sign you are struggling with debt. Once you have paid your bills for the month, you have nothing left over for a family night out – or sometimes even for groceries. This forces people to use credit cards to cover basic necessities. This further encourages a lifestyle of indebtedness because you are essentially linking your existence with your access to credit. If you cannot survive without your credit card, you could be setting yourself up for trouble.
Letting savings slip
If you have a hard time making ends meet, you’re probably not saving any money. As the saying goes, “into every life, a little rain must fall.” Your savings are an important component of overall financial health – they form a cushion in times of financial hardship. If you were to be laid off or forced out of work by illness, how would you manage? Longstanding wisdom holds that you should save a dime out of every dollar you make – 10 percent of your take-home pay. Struggling to put away even 1 percent is another indication that your financial troubles could be serious, and that your situation might be more precarious than you’ve acknowledged. If you can’t pay more than the minimum on your credit cards, you have no room in your budget to weather the bumps in the road that can happen at inopportune times. If you fail to put away even a little bit of your paycheck, the debt you currently have right now might be too much to sustain.
Sometimes a fresh perspective can help you reign in your spending and start empowering your new savings goals. It may be time for you to connect with reliable resources that can walk you through your finances, help you create a budget and provide the confidence to deal with your debt head-on.