Almost all Americans have debt.
Debt is normal, and for many, necessary to accomplish dreams of a college education or home ownership.
But when debt includes thousands of dollars in credit cards or other “toxic debt” and becomes out of control, financial stress can result, and people can struggle to pay bills, have a relationship, or even rent an apartment.
The desire to have less debt is as significant for many people as the desire to weigh less.
Debt by itself isn’t bad. But when debt leads to stress, depression and mental illness, it may be time to do something.
You are not alone if you struggle with debt. It isn’t just gambling addicts or compulsive shoppers that struggle with money problems.
What is Too Much Debt?
Here's the deal:
There is no universal definition of how much debt is too much debt.
Some financial experts say that any debt other than a mortgage or a student loan is too much debt.
Others say you have too much debt if you have toxic debt, such as payday loans, car title loans, or rent-to-own lending.
The truth is:
You have too much debt if you are unable to pay your debt.
If you struggle to meet your financial obligations, your credit score will reflect that, and your balances will only grow with late payment fees, and “penalty” APRs, if you have credit cards.
This can lead to a lifelong struggle that can be as encumbering as a drug or alcohol addiction.
If you are a good job and make decent income, you may be able to carry a fair amount of debt each month and not even feel it.
Get a Pulse on Your DTI
Understanding your debt to income ratio (DTI) is a good way to determine if your debt is what lenders consider a healthy amount.
Add up your monthly debt payments, such as credit card payments, student loan payments, personal loan payments, car loan payments, and your rent or mortgage payment.
Once you have that number, divide it by your monthly income.
For example, if your monthly debt is $2,500, and your monthly income is $5,000, your debt to income ratio is .50 or 50%.
This is considered high.
Mortgage lenders like to see less than 35% DTI.
Signs You Have Too Much Debt
If you identify with some of these signs, it may be time to evaluate your financial situation, and take steps to turn things around:
1. You have no idea (or underestimate) how much you owe
If you do not know at least the approximate balances on your revolving debt and installment debt, you may be in denial about your current situation.
Start by writing down the accounts you have for credit cards, personal loans, auto loans, student loans, home mortgages and any other debt. Look for patterns in your spending.
For example, is most of your spending on the weekends? When you go out with friends, do you always end up driving (and paying for gas)?
If you see these patterns, take the opportunity to discuss with your friends, and change things for the future.
2. Your credit card balances are going up, not down
If you are still easily making minimum payments, but your balances continue to grow each month, you are creating a financial problem that will only become harder to pay off in the months and years to come.
If you keep a spreadsheet of your credit card “statement balance” each month, you can easily track the balance and observe trends. Has your balance gone up month after month?
Review your next credit card statement and see what you’re spending money on.
Is it daily trips to Starbucks? Splurges at Nordstrom? In-app purchases to play Candy Crush? Monthly subscriptions that you don’t use?
Going line-by-line for each charge, ask yourself if it was a good use of money, and whether you truly could afford it.
Even if you can afford it, ask yourself if it was a smart purchase.
3. You have no savings / emergency fund
In 2016, the Federal Reserve conducted a study of 5,000 people to see how many of them could come up with the cash to cover a $400 emergency.
The survey found that 46% of Americans did not have the cash and would have to put on a credit card or borrow from family or friends to cover the emergency.
Almost all financial experts recommend having an emergency fund.
If you are employed, you should have at least $1,000 to cover unexpected emergencies like a car repair, emergency vet bill or emergency dental implant.
Ideal Size of an Emergency Fund
|To start...||Ideal goal...||Super safe...|
|$1,000||3-6 months of essential expenses||12 months of expenses|
Ideally, you should have 3-6 months of savings to cover you if you are unable to work, but $1,000 is a good start. If you have no savings, start with your next paycheck, and set aside as much as you can afford until you’ve allocated $1,000.
Even if you can only afford to set aside $10 a week, it is better than nothing at all.
4. You've used credit cards for cash advances
If your only way to access cash in a pinch is to take a cash advance, you are not managing your finances correctly.
Making setting aside income for your emergency fund a priority.
If you ever need it, pull cash from your emergency fund and save yourself cash advance and high interest fees.
Using a cash advance from one credit card to pay the minimum payment on another credit card is a clear sign of too much debt.
5. You are not honest with your significant other about your spending
If you downplay your spending, lie by omission, or have a secret checking account or credit card, you may be committing “financial infidelity."
If your partner discovers your shenanigans, this may lead to disagreement, loss of trust, separation or even divorce.
Treat your partner with respect by being honest with them, as you would want from them.
6. You open a new credit card when the old one is maxed out
If you have multiple credit cards that are all maxed out, your credit utilization will be high.
Although it is still possible to have a good credit score with high utilization, keep in mind that 35% of your credit score is based on your utilization. Aim to keep your utilization as low as possible.
Continually opening new credit cards and slowly growing your balance month after month, simply isn’t sustainable.
7. You are missing bill payments
On-time payments are essential to good credit.
Always pay at least the minimum payments on credit cards, loans, and mortgages.
Having an emergency fund can save you in a pinch, by allowing you to at least be able to cover your minimum payments.
Although you should avoid payday and short-term loans, whenever possible, a short-term loan from a family member to cover a bill payment is preferable to a short-term payday loan.
If you struggle to remember due days for your bills, add the due dates to your calendar and set up reminders.
8. You can’t sleep at night because you worry about finances
If you are losing sleep at night because you are worried about how you will pay your bills, it’s time to take control of your future.
9. You are depressed about your financial situation
One study, conducted at the University of Nottingham in Great Britain, found that people who struggled with their finances were twice as likely to suffer from depression.
Even if you are not depressed, if you have a lot of debt, you are more susceptible to depression than others who do not carry debt.
If you’ve ever worked to lose weight, you know that you can successfully lose weight by eating less, or burning more calories through exercise. The most effect approach will incorporate healthy eating and more exercise. Similarly, if you’re trying to lose debt, you can do so by spending less, or earning more income.
Take Control of Your Spending + Look for Ways to Earn More
The best way to tackle your debt is to track your spending.
You can use one of several popular apps or websites to track everything you spend from gas and public transportation to eating out and entertainment.
Along with tracking your spending you can set financial goals, and track due dates, which will help ensure you never miss a payment.
Along with paying more than the minimum, you can also:
Consolidate debt from higher to lower interest rates
If you qualify for lower interest rates, consolidate higher interest credit cards onto a lower-interest balance transfer card or personal loan.
Pay as much as you can on your credit cards each month.
Build that emergency fund
Even if it’s just $10 per month, save what you can. Use online savings account because of low fees and high APYs. If you find yourself dipping into money in savings, set aside what you can into 5-year certificates of deposit (CDs), which will prevent you from accessing the funds without paying a penalty.
Once you know exactly how much you’re spending and what you’re spending your money on, you can further tip the scales in your favor by increasing your monthly income.
This is not necessarily a part-time, second job.
Perhaps there are overtime opportunities at your work, or you can offset your gas expenses by sharing your drive home with a carpool commuter or rideshare app.
If you are not happy with your financial situation, seek help from a trusted financial mentor or nonprofit debt counselor who can further guide you and advise you on how to achieve your best financial future.
Stay positive, and strive to make your financial situation improve each month over the last.