By Jennifer Tucker
October 24, 2023 | 2 Min. Read
Debt can be a powerful tool when used wisely, helping individuals and businesses achieve their financial goals. Whether you’re considering taking on debt for a mortgage, education, or starting a business, it’s crucial to understand how much debt is okay to have.
One of the key measures to assess your debt load is the debt-to-income ratio (DTI). It’s calculated by dividing your total monthly debt payments (including mortgage, credit cards, student loans, and car loans) by your gross monthly income.
A DTI of 20% or lower is generally considered healthy, as it indicates that you’re managing your debt well within your means. A DTI between 20% and 36% may still be manageable but could indicate that you’re approaching the upper limit of acceptable debt. A DTI above 36% may signal financial stress and can limit your ability to save, invest, or handle unexpected expenses.
Check out Marine Credit Union’s Debt-to-Income Ratio Calculator here.
The amount of debt that is acceptable depends on your financial goals. For instance, taking on a reasonable amount of student loan debt to invest in your education may lead to higher earning potential in the long run, making it an acceptable choice.
Similarly, a mortgage to purchase a home can be considered good debt, as it builds equity and provides housing stability.
However, when debt accumulates for non-essential items or lifestyle choices, it may hinder your progress toward important financial goals like retirement savings or emergency funds.
The interest rates associated with your debt also play a crucial role in determining its acceptability. High-interest debt, such as credit card debt, can quickly become unmanageable, as it can significantly decrease your financial health.
On the other hand, low-interest debt, like a mortgage or certain types of student loans, may be more manageable and can be considered acceptable if they fit within your budget and financial goals.
Your risk tolerance is a personal factor that can influence how much debt is acceptable. Some individuals are more comfortable with debt, while others prefer a debt-free lifestyle. Assess your own comfort level with debt and consider how it aligns with your financial goals and values.
Debt isn’t an inherently bad thing to have if it is helping you build on your financial responsibility, your credit score, or equity. Debt becomes bad when it is unmanageable and spirals out of control.
If you find that your debt levels are higher than you’re comfortable with, it’s essential to create a plan to manage and reduce your debt responsibly:
Establish a realistic budget that prioritizes debt repayment while covering essential expenses.
Focus on paying off high-interest debt first to reduce interest costs.
Build an emergency fund to cover unexpected expenses, so you don’t have to rely on additional debt in times of crisis.
Consider debt consolidation options if they can lower interest rates and simplify repayment.
Seek advice from a financial counselor or advisor if you’re struggling to manage your debt effectively.
If any of these solutions sound like the perfect option to you, Marine Credit Union can help you get started. Reach out to MCU today and find your path to better financial wellness.
Check out more resources on MCU’s Financial Wellness page.