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How Much Debt Is Manageable For You?

Going into debt requires planning to ensure that you borrow a comfortable amount. People often talk about the kinds of items that make sense to go into debt for, but perhaps more important is determining how much debt you can reasonably incur. If you are thinking about how much debt is appropriate for you, consider the following tips.

Calculate Your Debt-To-Income Ratio


The first step in determining how much debt you can afford is to calculate your debt-to-income ratio (DTI). This figure tells you in raw numbers exactly what you can afford to pay out given your average monthly income.

There are two kinds of DTI. The first is called the front-end ratio, and accounts for the percentage of income going to all housing costs. These include mortgage, homeowner’s insurance, rent, property taxes, etc.

The second DTI is known as the back-end ratio and accounts for the percentage of income that goes to all other debt, such as credit cards, car loans, etc. To use a free DTI calculator, check out BankRate and determine your unique DTI.

Consider Future Necessary Debt


There are times in your life when taking out consumer debt can be manageable, and then there are times when it can pose a serious threat to your future goals. These latter times are generally considered to be transitional stages in life when you will need money and debt room to take the next step in your life or career.

As an example, if you are just out of college and are considering buying a home and starting a new job, it is dangerous to run up a heavy credit card bill for less important items (think – new clothes or personal electronics). You will soon need your credit to afford mortgage, car, or rent payments – this means you should prioritize your debt room for what matters most.

Conversely, if you are comfortably settled into a home, easily affording payments, and see no short-term necessity for borrowing money, it is probably alright for you to take out a loan for home improvement or accept a credit card offer for some new items you desire.

Consider How Comfortable You Are Owing Money


In addition to the economic considerations for taking out debt, you should also consider your personality type. The fact is, there are some people who are comfortable – in fact perfectly happy – owing a lot of money for the things they enjoy. Conversely there are those who are literally kept up worried at night by the balance on their bills.

Chances are you fall somewhere between these two extremes and it is beneficial to gauge how much debt you are comfortable owing before taking it out.

Summing Up

  • Calculate your DTI.
  • Consider future debt needs.
  • Assess future financial goals.
  • Decide how much debt you are comfortable living with.
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