Debt can feel like a massive weight around your neck. And if your debt is increasing by the day, it can feel totally hopeless. But you’re never out of options. There’s always something you can do to attack your situation and set yourself up for a more positive future.
How Much Debt is Too Much?
Let’s start by getting clear on what is meant by having too much debt. (After all, some debt can be good debt. While other debt can be bad debt.)
Generally speaking, any debt-to-income ratio higher than 43 percent is considered too high. If you’re at or above this threshold, you should consider taking action as soon as possible. But even if you land in the 36 to 42 percent range, this is still an indicator that you’re in a bit of a danger zone. Ideally, your debt-to-income ratio is below 36 percent, which is considered normal, manageable, and healthy. However, with all things, there’s some variability here.
It’s not just important to look at the total dollar amount of your debt you have and the percentage of your income that it represents. You also have to consider the type of debt. Personal finance experts often discuss debt in two buckets: good debt and bad debt.
“[Good debt exists] when the interest rate is low and fixed, and the loan is used to buy something that grows in value, like a house, business or college education,” NerdWallet explains. “It’s also good if the interest is tax-deductible, like most mortgage and student loan interest.”
On the other hand, bad debt exists when the interest rate is high, variable, and/or the money is used to buy things that lose value. Examples include cars, high-interest personal loans, credit card debt for things like vacations, medical debt, etc.
3 Ways to Get Out of Debt
If you’re facing large amounts of debt, you’re probably looking for a way to get your finances back on track. Here are a few suggestions:
- Create a Spending Plan
It’s impossible to be healthy financially if you don’t have a clear understanding of how much money is coming in and going out each month. This is why it’s crucial to develop a spending plan, otherwise known as a budget.
A budget forces you to account for how much money you’re earning and where it’s going. The mission is to account for every dollar, which allows you to see how you’re doing in different areas of your finances.
There are plenty of helpful resources out there that can show you how to develop a spending plan. Pick a strategy that you like and go with it. It’s less important how you do it and more important that you just commit to doing it.
- Develop a Debt Strategy
You can’t continue to approach debt without a clear and defined strategy for how you’re going to repay it. You need to develop a specific plan of action.
There are plenty of unique approaches to debt repayment – and it would be a good idea for you to review each of them. Two of the most popular include:
- Debt Snowball. With the debt snowball approach, you make a list of all of your debts, smallest to largest. Then, you begin paying off the smallest debts first (regardless of the interest rate). The idea here is that you make quick progress – crossing debts off your list – which helps build momentum and simplifies your financial picture. Before too long, you end up with just one or two big debt items that you can focus on.
- Debt Avalanche. This approach technically makes the most sense if you’re trying to avoid paying more than you have to. With this approach, you make a list of your debts, with the highest interest rates at the top and the lowest at the bottom. You then proceed to pay off the high-interest debts first and work your way down to the ones with the lowest interest.
There’s no right or wrong way to approach your debt. The important thing is that you pick a strategy, commit to it, and don’t stray.
- Speak With a Bankruptcy Attorney
It’s easy to talk about spending plans, good debt, bad debt, snowballs, and avalanches in an article. However, it’s sometimes more challenging to actually know how to execute in real-life scenarios.
If you’re uncertain of how to proceed, you may want to speak with a bankruptcy attorney to understand all of your options. They can help you determine whether or not you should continue aggressively paying down debt, or whether bankruptcy might be a better alternative.
The Consequences of Overwhelming Debt
If you’re facing large amounts of debt – good or bad – it’s important that you do something about it sooner rather than later. The consequences of overwhelming debt are serious, potentially including:
- Financial Consequences. The primary consequences are obvious. With high debt, you risk negatively impacting your credit score, blowing through your savings, and forcing yourself to go into even more credit card debt to sustain your daily lifestyle expenses.
- Mental Consequences. Debt-related stress and anxiety are real. Left untreated and ignored, it can eventually lead to even more serious and long-term consequences, such as depression.
- Physical Consequences. As you become crippled by debt, the stress and anxiety you feel can lead to unhealthy physical habits and dependencies. This may include: exercising less, eating less healthy foods, consuming excessive alcohol, etc.
- Relational Consequences. When your finances get out of whack and you become overwhelmed by stress and anxiety, which causes you to eat less health and depend on unhealthy crutches, your relationships also suffer. This can result in toxic friendships, unhappy romantic partnerships, and family drama.
These are just a few examples of some of the consequences of drowning in debt. But there is good news: The sooner you take proactive steps, the faster you can protect yourself from experiencing many of these issues. Implement some of the tips discussed above and put yourself on a new track for a healthier year!