Debt Management

Need a tip to keep you debts under control? Why, spend less than you make, of course!

Debt management is one of those daily challenges that anyone can struggle with - whether you're in your early 20s and paying off a student loan, in your late 30s with a young family and a mortgage or in your early 60s and facing retirement.

Indeed, how well you manage your debts often has little to do with your age or how rich you are. For a lot of us, no matter how much money we make we can never seem to get a handle on our finances. Statistics show that a high percentage of middle-class Americans are drowning in debt - mostly to fund a lifestyle they can barely afford.

Mind you, a little bit of debt isn't necessarily a bad thing. It can help maintain your credit score at a respectable level and help to finance those more expensive household projects that mean a lot to you. There is also the concept of smart debt, whereby you're taking out loans to finance an investment property or group of investment properties that you hope will eventually provide you with an additional source of income.

Where people get tripped up is on debt that isn't so smart - i.e., borrowing money to fund an array of luxuries on top of all the other necessary debts and expenses you have.

These can include:

  • Your mortgage Yes, any financial planner worth his or her salt will tell you a house is a good investment, but bigger doesn't necessarily mean wiser. Families often struggle when figuring how much house they can actually afford.
  • Student loans The cost of education keeps climbing higher, to the point where they college grads are leaving school with an average of $19,000 in student debt. This can cripple your finances for years after you've gotten your degree or diploma.
  • Car payments. Same concept as your mortgage: a necessary expense, but one that can easily take you outside your financial comfort zone.
  • Credit card debt. Often referred to as revolving credit, many consumers have gotten into the habit of using new credit cards to pay the debts off older ones. A bad idea, since most credit card companies hike your interest payments after the initial low-interest trial period has passed.
  • Payday lending. A columnist at MSN Money referred to this as the financial equivalent of shutting all the windows in your house and turning on the gas. These kinds of lenders should be avoided at any cost.

The best way to figure out whether you've got a good handle on your debt management is to figure out what your debt-to-income ratio is. You determine this by adding up the monthly cost of servicing all of your debts—house payment, car payment, student loans, minimum credit card payments, etc—and measuring that as a percentage of your total monthly take-home pay. A debt-to-income ratio below 30 percent is considered excellent; 30 to 45 percent is considered average and manageable. Anything above 45 percent puts you into dangerous financial territory. If this is you, you probably need to seek help from a professional!

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