How do you know if you have an excess debt burden? Financial experts will throw out a number that represents debt as a percentage of your income, aptly known as your debt-to-income ratio .
But no matter where your debt-to-income ratio is 10%, 25%, 35%, 50%, or even 75%, the bottom line is:
– Do you have enough discretionary income to take care of your family's needs for the present?
– Are you able to put away some money every month to save for a rainy day, when an emergency arises?
– Are you able to put money away so that you can retire some day and never have to work again?
– Do you have enough money left over every month to engage in leisure activities?
If the answer to all of these is "yes", then you do not have an excess debt burden. If you make $ 100,000 a year, you pay $ 70,000 a year toward committed expenses and towards debt payments, and you are able to do all of the above with the remaining $ 30,000, then you are okay.
If the answer to any of these is "no", then you need to take a cold, hard look at your personal financial situation. You will need to find a solution to eradicate your excess debt burden as soon as possible, so that you will have enough money to take care of those four spending categories above.
At the end of the day, an excessive debt burden can interfere with your ability to live your life to the fullest, to have peace of mind, and to achieve financial freedom.