Just about everyone is in debt to some extent. It’s estimated that the average American owes around $90,000 through a combination of student loans, mortgages, credit card bills, and personal loans.
It’s generally accepted that, while not ideal, it isn’t necessarily the end of the world to be in debt. It is, however, important to recognize that there are good debts ‒ those that are expected to increase your quality of life and lead to an improvement in your financial situation down the road, like student loans and mortgages ‒ and bad debts, generally seen as superfluous, like car payments or shopping sprees.
So, if being in debt is seemingly unavoidable, then what’s the big deal? Because every person’s financial situation is different, it might be prudent to take a step back and assess whether you’ve got more debt than you can reasonably manage.
1. You’re unsure of how much money you actually owe
Part of responsible debt management is making payments on time—i.e., keeping track of your credit card statements, how much you owe on your student loans, and how much you owe on your mortgage. If you’re unable to reasonably gauge how much money you owe to the various institutions to which you are indebted, then you might be in over your head. Tools like a loan payoff calculator can simplify your debts and help you avoid late fees, which would only put you further into debt.
2. Your minimum payments outpace your income
It doesn’t take a financial expert to recognize that if the total combined payments of your debts exceeds your monthly income, then you’ve got an unreasonable amount of debt. An inability to make payments on time means you’ll incur late fees, be subject to higher interest rates, and damage your credit score. If you’ve found yourself in a situation like this, you’ll need to come up with a plan to cut frivolous spending to pay off your debts on time.
3. You need to borrow money to keep up with payments
Incurring new debt to pay off old debt is like putting a bandage on an ax wound. While the process of borrowing money to pay off debts can be carried out responsibly, taking out a cash advance or using credit cards to pay off old debts can just lead to even worse debt down the line.
4. You have no savings
A lack of savings isn’t necessarily indicative of having too much debt. The problem truly arises when your absence of savings is a direct result of debt. If you’ve drained your savings to pay off debts, it likely points to the fact that you’re carrying too much debt. Having no safety net for emergencies could put you in a troublesome position in the future.
5. You need to use credit for normal expenses
There isn’t anything inherently wrong with using credit cards for everyday expenses. In fact, regularly using your credit cards can boost your credit score, if you can make payments on time. However, if using a credit card for everyday expenses becomes a necessity because you don’t have regular access to funds as a result of paying off your debts, then you might have too much debt.