top of page

debt management overview

Managing debt is extremely important. Too much debt can drastically impact your overall financial health. So how do you know how much debt is too much debt?

Everyone’s tolerance for debt is a little bit different. But as a general rule, you want your total monthly debt payments to be under 36% of your monthly gross income.

In the example below, this person’s outstanding debt is a mortgage, an auto loan, a credit card, and a student loan. When she adds up all those monthly payments and divides by her monthly gross income, she gets a percentage of 27%. So, her debt service ratio is below the recommended limit of 36%.

But be aware- many banks will extend credit up to a debt service ratio of 45% or even 50%. If you take the maximum the bank is willing to lend you, you may not be able to afford your lifestyle spending wants or to save for retirement.

Be extremely cautious when using credit cards. Snowballing refers to when debt grows and grows, like a snowball rolling downhill. Credit card debt is particularly easy to snowball and difficult to manage once that happens.

Do not charge more on a credit card than you can pay off at the end of the month. Credit cards carry some of the highest interest rates because they are “unsecured” debt, meaning they aren’t backed by an asset such as a home or car.

Too much outstanding debt can impact your credit score, and lower credit scores can cost you tens of thousands of dollars in interest due to higher rates on mortgages and car loans over your lifetime.

When paying off debt do so responsibly by still prioritizing two big pieces of your overall financial health – Emergency Fund Savings and Retirement Plan Savings.

If you have outstanding debt, consider these steps: Organize and Identify all Outstanding debts

Have an adequate amount saved in an Emergency Savings Fund. Making sure we have the emergency savings in place is more important than paying debt off early. This helps ensure that you will not have to take on credit card debt if an emergency arises.

Contribute to your retirement plan. If your employer provides a matching contribution, contribute at least the amount necessary to receive the full company match.

Our “Debt Snowball Spreadsheet” is available as a resource to you. This will help you organize and prioritize your outstanding debt and understand how different payment amounts affect your payoff dates for each item of debt.

*Hypothetical scenario for illustrative purposes only

bottom of page