How Much Debt is Too Much?

Vincenza Vicari-Bentley, AFC
USU Extension Empowering Financial Wellness Program Coordinator

It’s a new year and with that comes new goals, fresh starts and perspectives.  In 2020 Americans racked up $601 billion to run the total U.S. household debt to record-shattering $14.15 trillion. So here we are in 2021 (and maybe looking at post holiday spending?). Have you been thinking about if you’re carrying too much debt? When it comes to the question of how much debt is too much, there are as many answers as there are people. Basic answer: It all depends on what you can afford. How do you figure out what you can afford? It’s called a Debt-to-income ratio or DTI. Whether you make $500 a week or $500 an hour there is a standard formula lenders use to determine when debt can become a problem. 

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Here is the math. Recurring monthly debt ÷ (divided by) gross monthly income = DTI. It is expressed as a percentage and, generally speaking, you would like that percentage to be 35% or less. Let’s say you make a monthly gross household income of $6,000. You pay $1,000 a month on your mortgage, $500 on your car loan; $1,000 on credit cards and $500 on student loans. Your total recurring debt is $3,000 a month. Recurring debt ($3,000) divided by gross monthly income ($6,000) = 0.50 or 50%, which is not good. Remember we want that to be 35% or less. Most financial advisors say a DTI higher than 35% means you are carrying too much debt. Others stretch the boundaries to the 36%-49% mark.

​The truth is that while DTI is a handy formula, there is no single indicator that debt is going to ruin your financial health. Everyone has a different level of tolerance or how much debt makes them feel uncomfortable.  So that means every month someone could have almost half of their income going to debt? But friends, I ask you this….what happens if you lose your job? Or go from a two income household to a one income household (did someone say baby?) Have an unexpected large medical expense? Do you have enough emergency savings to protect you when “life happens”? There are some warning signs that you have too much debt. Are you only able to make minimum payments on your credit cards? Are you unable to pay off your credit card debt within a year or are you are using credit cards to pay for essentials like gas and food because you’re out of money? Between the warning signs and the debt-income-ratio, hopefully you’ll come up with an answer to the question of how much debt is too much debt for you.

So if you determine that you have too much debt - what now?
1. Make more money, cut expenses or both.
2. Have a spending plan (budget). Just examining where your money is going each month raises the level of consciousness about how you spend your money and you are usually more intentional.
3. Stop using debt.  All these sound easy but it takes dedication and a plan. 

Want in on a little secret? Go to www.powerpay.org and check out our free debt elimination tool! Remember that there are ways to ease your burden - so take the next step! Make this the year you are on a financial path that leads you to make your dreams come true and find financial peace and freedom!  Happy New Year!
 
References:
“Total Household Debt Increased in Q3 2020, Led by Surge in New Credit Extensions; Mortgage Originations, Including Refinances, Continue to Soar.” Federal Reserve Bank of New York, 17 Nov. 2020, https://www.newyorkfed.org/newsevents/news/research/2020. Press release.