(MoneyHippo.com) – People often associate the word debt with something negative. Those looking to build wealth often hear advice suggesting they pay down their obligations to get on track. Yet, debt isn’t necessarily a good or bad thing. What matters is how much you carry compared to your income, what sort of financial commitments you have, and whether it’s a drain on your bottom line.
So, how much is too much? Several factors contribute to an answer. First, look at your debt-to-income ratio. You can calculate this value by summing up outstanding monthly obligations, dividing that sum by your monthly income, and multiplying by 100. Ideally, you want that percentage to be less than 36%.
This ratio doesn’t account for everyday expenses like food and gas, so you want to ensure you have enough money to cover those costs. If you don’t or if you struggle, it might be because you’re carrying too much debt.
Finally, look at the types of obligations you have. Floating a credit card balance with no appreciating asset on the other end constitutes debt that doesn’t help your bottom line, whereas using credit to acquire a house that is likely to go up in value could help you build overall wealth in the long run.
Copyright 2022, MoneyHippo.com