We’ve gone from a nation of savers to a nation of borrowers – taking out credit cards, dipping into our overdrafts and using payday loans to combat ever-rising prices and to fund our 21st century lifestyles.

It is, perhaps, unrealistic to think we might get by without any debt whatsoever, which isn’t an option for some. And while a little debt isn’t too bad (albeit undesirable), so long as it’s not literally breaking the bank and you have a solid budget in place, you’ll likely manage.

But how much is too much debt?

Looking out for the warning signs

How Much Debt Is Too Much?

First, you’ll want to know if you definitely do have too much debt – and thankfully, with finances, there are a few warning signs that gives you a heads up that your debt’s are no longer healthy or become unmanageable. If any of these sound familiar – or all of them – then your debt may have grown too large…

  • Your debt never goes down…
  • …And it’s forever increasing
  • You don’t know how much you owe
  • You borrow to fund living costs
  • You can no longer afford even minimum repayments
  • Your bills are paid late, or not at all

Are you swimming in too much debt?

How Much Debt Is Too Much?

Since everybody’s finances and income are subjective and ever-changing, there’s no single figure to put on debt. After all, if you owe half a million pounds, but you earn £100 million a year, that’s not going to feel too harsh. But if you’re on the average national salary of £26,000, half a million quid in debt is going to feel more than a little rough on your wallet.

So, what you need to do is figure out your total debt-to-income ratio (which is exactly as it sounds). To do this, start by adding up every single one of your expenses, including…

  • Rent or mortgage
  • Energy
  • Internet and phone
  • Transportation
  • Shopping
  • Loan repayments
  • Credit cards and overdrafts
  • Minor additional expenses, like football subs and club costs

Next, you need to add up all your regular monthly income, which include things like…

  • Salary
  • Bonuses and dividends
  • Rent, if you let properties

Now, divide how much you’re paying out by how much you’re actually taking home – and multiply that by 100, because we’re looking for a percentage here.

What you want to see is a figure that’s 36% or less – that’s the sweet spot. The absolute best place to be is when your debt ratio is 30% or under; if you have a debt ratio of 40%, then alarm bells should be ringing.

Your next steps

How Much Debt Is Too Much?

Even if your debt-to-income ratio is below 36%, if you’re concerned about how much you owe, the first step is to seek advice from an expert as to how to lower your personal debt burden – and, in time, boost your credit rating and allow you to save more.

And, of course, stop borrowing where possible, particularly if you’re holding more debt than you can ever hope to repay; if you’re looking at a 40% + total debt-to-income ratio. The last thing you want to do, after all, is take on more debt to handle the existing debt, or simply add to what’s owed.

Finally, be sure to start and maintain a realistic budget. Armed with the figures you’ve created for your debt-to-income ratio, it should be easy to pop these into a spreadsheet so you can manage precisely what you earn and what you pay out.

About author

Master of the budgets. Provider of the tips. Author and owner of DumbFunded.co.uk.
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