If you read the Debtry blogs (or any of the articles posted across the Goalry family) regularly, you already know I’m not going to just throw you a percentage or dollar figure for this one. That’s not because I’m trying to be evasive. It’s because the answer to this question depends on what you mean by “too much” and what kind of debt we’re talking about. In other words, it’s not the same for everyone.

Let’s look at some warning signs that your debt is the wrong sort of debt, or too much debt, or otherwise out of control (or heading that way). The goal isn’t to panic, or feel bad about our decisions, our bad luck, or how unfair the world can be. The goal is to take more effective control of our finances. That means figuring out what parts we can control and what taking better control could look like.

First, though, let’s look at seven different ways to answer today’s question: How much debt is too much debt?

Some financial advisors insist that ANY debt is too much debt. In their view, asking how much debt is too much is like asking how much of your house should you let burn down before you call the fire department, or how pregnant you have to be before you’re on your way towards having a baby.

They’re not wrong. Debt can be like smoking or drinking or gambling – a vice that may be manageable in small doses, but easily spirals out of control and does predictable, serious damage. If you’re not currently in debt, and can manage to avoid getting into debt, more power to you. I have absolutely no objection to the Dave Ramsey approach or any other reputable plan for debt free living (as long as no one’s asking you to buy their introductory “how to get out of debt” kit in seventeen easy payments of $48.88 or whatever).

At the same time, debt can be a powerful tool. Not all debt is destructive. There are many different types of debt that can help you move forward with your goals and strengthen your financial position. Most of us would never own a nice home without the option of taking out a mortgage. Many Americans buy their cars or trucks through financing and do just fine with that. Even credit cards – the hand grenades of the financial world – have the potential to offer flexibility and security through responsible, strategic use.

I’m not sure this answer is everyone’s answer to how much debt is too much. It’s at least not my answer.

This is undisputedly a red flag. You keep paying on your student loans, your credit cards, your past due medical bills, etc., but the balances appear to stay the same. Even worse, some of them are getting higher due to interest and late fees. It’s a horrible feeling, and each month it gets a bit harder to see a way out than the month before. For those of us making $60,000 or less a year, it might be about to get worse. As Politico.com recently reported:

A new phase of the economic crisis is looming for the winner of Tuesday’s presidential election: potentially massive defaults by jobless Americans on consumer loans as the chances for more federal relief this year diminish.

Many of the rent-deferrals and other Covid-19 adjustments expire at the end of 2020, and as of this writing, there’s little hope of Congress pushing through another aid package this year or in the foreseeable future. While folks with upper-middle-class jobs or working in high-end careers have largely recovered (at least economically), the rest of the population is still experiencing severe job and wage insecurity. Consumer debt being what it is in the United States (even long before the ongoing pandemic), this is frightening for many hard-working families.

There may be no easy solutions for this one, but if you simply can’t get on top of your debt – if you don’t have a clear and realistic plan for resolving your existing debts with your current income and circumstances – the worst thing you can do is try not to think about it and just keep hoping something will come through. Set aside an hour or two a week to look at options for paying down credit cards more effectively, consolidating your debt, or otherwise taking more effective control.

The Debtry blogs and other reputable sites are a great place to start. Many people are in a similar situation. Many others, however, used to be – and found a way through. You can, too.

You may not think of this as a debt issue. I’d respectfully suggest, however, that if you’re not getting ahead in terms of savings and investments and preparing for the future, you’re as good as falling behind.

Most financial advisors agree on the importance of having an emergency fund which is easily available in times of, well... emergency. Ideally, this would be enough to pay your major expenses for several months if you should lose your job or encounter another major, life-changing events. If that sounds unattainable, at least in the short term, consider shooting for one month’s worth of major expenses in savings. If even that seems impractical, start with $500. Or $250.

You’re going to think I’m kidding, but having $50 in savings for a rainy day is better than not having it. Obviously, you should build from there, but the journey of a thousand dollars begins with a single deposit. If you are interested to start saving, consider the savings account options below:

It’s easy to dismiss your credit score as one of those quirky little things that may be important here and there. Maybe when you’re buying a car or trying to refinance your home... but other than that, does it really matter?

Oh, honey.

Ask the same question with, say... your blood pressure. Or how often you change your car’s oil. Does it matter how long you go between replacing the air filters in your home? Should I floss even though my next dentist appointment isn’t for a month? Does what I eat each day matter even when I’m not going to be weighed at the doctor’s office that morning?

Don’t get me wrong. Your credit score isn’t the most important thing about you. It’s not a good evaluation of you as a person or anything. On the other hand, every dollar of debt you have or may have in the future is shaped dramatically by this little 3-digit number. Your credit score determines whether the $40 dinner you pay for with your credit card actually ends up costing you $45 or $75 by the time you’ve paid it off. It impacts the cost of financing a vehicle by literally thousands of dollars, and of buying a home by tens of thousands.

A low credit score can be the difference between getting approved to lease an apartment or turned away. It can cost you that job you really wanted. It impacts your insurance rates and the neighborhoods you’re qualified to live in. How much debt is too much?

Debt that impacts your credit score is too much. It means every dollar costs you more and it limits your options now and in the future - often exponentially. Better credit means more options at a lower cost, which in turn makes everything more affordable and allows you to improve your credit even more.

I suggested above that not all debt is the same. Some debt is definitely avoidable and other debt is often far more unpleasant. One of the problems with bad debt is that it makes it difficult (or impossible) to secure good debt – the right sort of financing for the right reasons.

Let’s say you’re living paycheck to paycheck for the most part. You’re not rich, but you’re comfortable enough compared to some of your friends and neighbors. You allow yourself a little more impulse shopping than you probably should – especially online or ordering carry-out. You got a great deal on this or that last month, which you didn’t really need, but hey... life is short, right? Sure, your balances keep creeping up and it’s probably not ideal, but you’re just not the type to get too focused on money.

A year or two down the road, your daughter tells you she’s getting married. You like the guy well-enough. He’s not rich, but he works and he’ll take care of her. You’d like to be able to give them a decent wedding, within reason. The problem is, you don’t have that kind of money in savings. Putting it on your cards would cost a fortune in interest, even if you could convince the issuing companies to raise your limits a bit. You’d like to take out a small personal loan to finance the wedding, but when you look at the terms you’re being offered...

Looks like it’s the back yard and one of those oversized cookies from the mall, kids. And here’s a nice gift card to Applebee’s for your honeymoon dinner.

I’m not knocking budget weddings. (Actually, I’m a big fan of back yards and giant cookies.) The point is:

You don’t have to live a Spartan lifestyle sleeping on cold concrete floor eating bugs while stuffing nickels and dimes into every crack and crevice for fear of poverty. Let’s try to have a LITTLE vision, however. Americans are notoriously horrible with long-term planning or even thinking. (This isn’t just true of individuals – even our state and federal governments can’t seem to look past next week sometimes.) Go against the grain and be an adult with your finances.

That’s nice. It’s also not the point. Money is a major stressor in many relationships. Study after study has shown that while money may not buy happiness, there is a basic basement-floor income necessary for ongoing contentment. In short, being rich may come with its own problems, but none of them compare to the traumas of being poor. Anyone claiming otherwise is lying or delusional.

Our love is bigger than money.

But let’s assume you’re not struggling to put food on the table. Money can still be a major issue in your relationships. It’s not really about the dollar amounts so much as it is the values being expressed and the perceptions by each party of what each choice says about the other, or about themselves.

For example, let’s assume your wife would REALLY like to remodel the bathroom upstairs. You don’t think you can afford it, and she’s tried to be cool with that. You still somehow manage to keep sending money to your adult children, though (thank you, PayPal!) and you seem to download a lot of new video games (your credit card is on file with Microsoft or Playstation or whoever) these days since you’re home more often.

You always prefer ordering into making dinner at home. The other night, when you suggest pizza (another card on file there, of course), she turns frosty and you have no idea why.

Is the issue how much debt is too much? Maybe not exactly. But that’s in the mix. The problem isn’t as simple as dollars and cents, but about which types of spending seem appropriate to each of you and which ones don’t.

There are probably a few things the two of you need to talk about other than the money itself. First, though, imagine how different that scenario is if you’d spent time together putting together a remodeling budget and projecting how long it would take you to save up enough to pay for the work out-of-pocket. Imagine if you’d discussed a reasonable balance of new games and dinner delivery and explained why those things were important to you, and they became part of your mutual budgeting?

I said I wouldn’t casually throw around dollar figures or percentages as if those were sufficient answers to the question. I didn’t say I’d avoid talking about numbers altogether.

One common rule-of-thumb comes from the Consumer Financial Protection Bureau. They recommend you keep your debt-to-income ratio below 43% at all times. Don’t worry if you’re not sure what that means – they actually explain it better than most:

To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.

For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio (DTI) is 33 percent. ($2,000 is 33% of $6,000.)

They’re not alone in citing that 43% target. Many financial experts agree this is the tipping point at which many consumers begin having trouble paying their bills consistently. Many mortgage lenders refuse to offer their best terms to anyone with a higher debt-to-income ratio than 43%.

It’s not the only percentage you’ll hear used regularly when asking how much debt is too much. Many creditors use a cut-off of 30% DTI to distinguish between ideal customers (who get approved at the lowest interest rates and with minimal fees or set-up charges) and potential problems. They also consider your credit score, of course, but guess what determines a good chunk of that? Your debt-to-income ratio!

The other popular percentages you may encounter are 28% and 36% - as in the “28/36 Rule.”

This one isn’t specifically based on DTI. Instead, it suggests that you spend no more than 28% of your gross income on rental or mortgage payments, including applicable insurance or fees. You should spend no more than 36% total on all of your debt – housing plus anything else you owe. This one doesn’t usually factor in utilities or other recurring expenses, but if it were me... I’d probably add them to the mix to be safe.

Conclusion

Could you manage debt free living? Possibly, if it were important to you. Is it essential? That’s up to you. We don’t tell people what to do with their own money. We offer advice and insight and connections to reliable online lenders (who tend to be more flexible and offer more competitive terms than traditional institutions). What you do with that information and those opportunities is up to you.

Do you have to stay buried in typical American consumer debt? Absolutely not. While every situation is different, there’s almost always a way through, up, or out. Often, there are several to choose from. It may not be easy, but it doesn’t have to be as difficult as it sometimes seems. And you don’t have to figure it out alone.

Let us know how we can help.