If the current economy has not been enough to cause people to re-evaluate their personal finances, it has at least brought to the forefront several issues with having debt. Since debt is an obligation to use future income to pay current needs, it goes without saying that one will have to have future income in order to meet those obligations.
With job losses, mandatory layoffs, and reduced salaries and bonuses, many people are feeling pinched by the debt that they hold. How can a person tell when he or she has too much debt? The following five clues will help determine one’s own debt situation.
Not Knowing the Amount of One’s Own Debt
Most people cannot name the amount of their debt down to the very dollar, but everyone should be able to come close to knowing how much they owe. At the very least, everyone should be able to name every one of their creditors. From there, it should be relatively easy to determine about how much is owed to each (such as $12,000 still remaining on the car loan, $10,000 on student loans, $3,000 on the MasterCard, etc.).
For those who do not know how much is left on each of their debts, or even who they owe, it is time to really sit down and evaluate their current plans and see if they can get a handle on their finances. It is difficult to plan a destination without first knowing one’s current position.
Not Knowing the Amount of Money Spent Each Month on One’s Own Debt Payments
Most everyone can state how much they pay on their mortgage, but many people do not know what they spend on all of their other debts combined. Part of the blame is on the credit card companies for constantly changing the minimum payments due. Another part of the blame is due to the nature of revolving accounts, where one can make additional charges each year.
A third part of the blame rests on the very individuals who do not know how many debts they have. For anyone to truly have a handle on their finances, and to be able to better estimate how much risk and debt they are willing to take on, it is imperative to first understand how much is being spent each month on debt payments.
Only Making the Minimum Payments on Debts
A five-year car loan does not have to take five years to pay off, unless the borrower only makes the minimum payments. Many borrowers do not look at a regular monthly payment (such as for a mortgage or a car loan) as a minimum monthly payment, but that is precisely what it is. It is the minimum amount one can send the bank, where anything less will get them into trouble.
More importantly, anyone making minimum payments on credit cards is in a more troubling financial position because not only are interest rates higher, but the payment structure on credit cards are designed to keep the borrower in debt for many years, resulting in total interest payments that are greater than the amount initially charged on the credit cards. As more of the balance is paid off, the minimum payment continues to decrease. It is recommended to pay a steady amount (assuming no new charges) on a credit card, even as the required minimum payment continues to decrease.
This Year’s Amount of Debt is Greater than Last Year’s
It is understandable that in the current economic climate people may be inclined to give themselves some wiggle room in terms of increasing their debt load, but an uncertain economy may be the worst time to accumulate debt. Debt becomes very risky in a climate of continuing job losses.
With the exception of students going to college or recent graduates, consumers should always be looking for ways to reduce debt amounts from one year to the next. Otherwise, individuals may find themselves spending their golden years working a second job or working well past the average retirement age just to pay off debts that accumulated for 40 years. See Five Tips to Keep More of Your Money to avoid overspending.
Debt is Causing Stress
Life throws so many curveballs that create stress: kids, work, marriage, health, etc. There is no reason to add debt to the mix, just to create more stress for one’s self. If an individual is facing any prospects of job loss, the amount of stress and worry would be much lower if that individual had no debt going into a job loss, especially if relocating to another city to find a job.
If an individual had no debt and had a significant emergency fund during a time when his or her employer was forced to reduce salaries by 5%, the adjustment would be uncomfortable, but not painful. On the other hand, when an individual’s debt payments and other expenses utilize 95% of one’s income, a 5% reduction would result in a budget with absolutely no wiggle room to work with at all.
Consumers who find that they can identify with multiple signs of too much debt may be in need of professional guidance. There are many options available including consumer credit counseling, financial coaches or planners, and self-reliant research with books, articles, and websites. For assistance to make the most of existing income, refer to Five Tips to Trim Your Budget by $300 per Month.
Bill Pratt - Bill Pratt is a former credit card executive turned student-advocate. He is the author of Extra Credit: The 7 Things Every College Student ...
