Taking on debt is a major decision that should never be taken lightly. Debt is a useful tool in helping you to achieve your financial goals whether you are planning to buy a house using a mortgage, go on a great vacation and book your airline and hotels using a credit card, or buy a new car and financing it with an auto loan. Debt used responsibly can help you achieve these goals. But if you carry too much debt or become irresponsible the debt can become a cash draining burden. One of the first steps in debt management is determining how much debt you can safely manage.
How much debt can you reasonably carry before you start to run into trouble?
Most financial institutions and credit companies will use a debt to income ratio to evaluate your credit worthiness and your ability to manage that debt.
In debt management, the rule of thumb is that your monthly housing debt payments should be no more than 28% of your gross income--this includes taxes, principal, interest, insurance and fees. Your total monthly debt payments including your mortgage payment, credit card debt,auto loans, child support and alimony should be less than 35% of you monthly gross income.
If your monthly gross income is $4,000, than your monthly housing payment should be $1,120 or less ($4,000 * .28). Using the gross income figure of $4,000 your total debt should be less than $1,400 a month ($4,000 *.35).
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