The sooner you acknowledge a money problem and address it, the sooner you'll make positive financial changes.

18 minute read

Hello friends. And thanks for joining me this week. My name is Laura Adams and I’m a personal finance and small business expert, author and educator. Who’s been hosting the money girl podcast since 2008. My mission here is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. I create every show to give you actionable strategies and practical advice and tips that you can use right away to take your financial life to the next level. Be sure to subscribe to the show and participate by sending me your questions. I’d love to know what your comments or, you know, what’s on your mind. I want this show to address what’s concerning you because what’s concerning you is probably concerning many people who are listening to the show. One way to reach out is to leave a message 24 seven on our voicemail line.

You can do that by calling (302) 364-0308. You can also email me using my contactPage@lauradadams.com. If you want to read a companion blog post for this or any of the shows they’re published every week in the money girl section@quickanddirtytips.com today’s episode is number 673 called how much debt is too much, eight warning signs. Dan is one of the most important aspects of your personal finances to master. It’s an incredibly powerful tool that can boost your success, or it can cause your financial life to crash and burn. So, you know, it’s very polarizing and I think the trick to using debt wisely is knowing the difference between good and bad debt and the right amounts to have based on your income and goals. I can tell you from personal experience that many of the deaths that I’ve taken on in my life have been very good. They’ve helped me make money.

They’ve helped me, you know, move my financial life ahead. And certainly there are deaths that I’ve taken on that have taken me backwards. So I think that you really have to weigh the pros and cons of different types of debt pretty carefully. So if you want to learn how to do that, you want to learn how to use debt strategically. So it helps you and doesn’t hurt you. This show is for you. Plus I’m going to cover eight ways to know if you have too much debt and some specific action steps that you can take that will protect your finances. All right, you’re ready to get started. I think debt is a pretty complex topic in general because people have different opinions about it. In fact, as I mentioned, it can be pretty polarizing because people have extreme opinions about it. Some people insist that no amount of debt is acceptable, not even a home.

Others acknowledge that some debts like a mortgage or student loans or okay, but they say that using a credit card or taking out a car loan is a mistake. And then there’s another camp that’s pretty liberal about it. That believes that using debt to purchase anything is acceptable. As long as you can afford the payments. You know, personally, I probably fall somewhere in the middle. Um, I do think that using debt strategically is a wise financial move. So, you know, I am not somebody that would say don’t get a mortgage. I’m not somebody that would say don’t take out a business loan or use a credit card strategically. I’ll give you a few guidelines here. My recommendation is that you should consider using debt in three circumstances. Number one, you’re confident that the debt will give you a financial return. And I’ll talk a little bit more about that.

Number two, you have a steady income or ample savings to repay the debt on time. And number three, you qualify for a competitive interest rate and terms. You know, there’s no reason to take out crazy expensive debt. You know, that is not going to help you, even if you consider it a good debt. So we’re going to go into a lot more detail about this. So let’s say that you buy an affordable home with a low rate mortgage. You can use that loan, that debt to build equity in the home over time. So as you’re paying down the principal balance and or as your homes value appreciates over time, you’re building wealth. So again, buying a home that will appreciate and value can help you build wealth because not only do you have the opportunity for price appreciation, but you’re also building equity as you make each of your monthly mortgage payments.

And in the beginning, it’s, they’re pretty interest heavy, but the longer you own the home, the more of the principal balance she began to pay off. That’s why financing a home is generally considered a good debt. Maybe it’s considered one of the best debts out there. Additionally mortgage interest rates are at historic lows. So it’s really cheap money. And those loans also come with an interest tax deduction. Making home loans costs even less on an after-tax basis, depending on where you live buying a home, maybe a lot less expensive than renting a similar property, especially outside of large cities. Another example of a good debt is a reasonable amount of student loans. Now I’ve talked about student loans a lot on this podcast. And certainly right now, there is a, you know, a huge burden on most people with student debt. But if you take out a reasonable amount, the interest rates are typically pretty low.

They’re going to depend on whether you’ve got a federal loan or a private loan, but in general, I would say student loans typically have relatively low interest rates. Plus some amount of the interest that you pay on those loans is tax deductible similar to a mortgage. You don’t get quite as much of a tax deduction with your education loans, but it does reduce the cost a bit. And best of all, getting an education gives you the ability to earn more money over your lifetime. And a lot of cases, significantly more money, depending on the type of education you get. And the career that you’re after. Of course, the problem with taking on too much debt is that it can hold you back from accomplishing key objectives, such as building an emergency fund, investing for retirement or reaching other financial dreams. So even for these good debts that I’m talking about, such as a home or an education loan, it’s really important to maintain reasonable levels based on your current or expected future income.

One guideline I can give you for student loans is that you might want to limit the total amount of your student loan debt to the amount of your income that you expect to earn after you graduate. So let’s say, you know, you’re in, I don’t know, computer engineering and you expect your first year salary out of college to be $80,000. Well, you might want to limit the total of all of your student loans over your entire education to $80,000. That’s just a general rule of thumb. And of course that’s varies depending on the field you’re going into. If you’re going to be a doctor or a dentist, for instance, you probably will have to take out a lot more in student loans and your income, you know, maybe relatively low in the beginning, but as you build up your business or your practice, you will earn significantly more as the years go by.

So, you know, that’s just a general rule of thumb. I would say for the average person, um, who’s not going into like a high dollar type of profession. So the takeaway is that you shouldn’t go into debt for something that does not give you a financial return. For instance, financing, consumer goods or vacations that causes you to lose wealth, not build it. And then you add high rate credit card interest on top, and you’ve got a potential financial disaster. If it takes you years to pay off a luxury item that you charged on a credit card, it could end up costing double or triple the original price. So not a good situation. So let’s go through eight warning signs that you may have too much debt that you should get under control sooner rather than later. And some action steps. So, number one, you’re unsure how much debt you have.

My friends. If you don’t know how much debt you have, or how many debts you have, you are not taking care of your financial health, staying aware of your accounts and your debt is the first step to getting them under control and improving your entire financial life. So take action. You want to get organized by creating a spreadsheet that lists each account, name, the account number, the interest rate you’re paying and the amount you owe, then sort those debts from highest to lowest interest rate in general, that’s the best way to tackle debt because it’s going to save you the most interest. And as you have that savings, you can use it to pay down more debt. However, I will say, if you have a small debt with a low interest rate that you’re just itching to get rid of first, go for it. You know, if there’s something that’s really bugging you and you just don’t like having that, that particular debt, there’s nothing wrong with starting there and paying that off first.

The second sign is that you avoid looking at your bills. If you are afraid to open your paper or your bills, because you just don’t want to see the balances. Remember that hiding from a financial problem, doesn’t make it go away. In fact, it’s probably going to make it a whole lot worse missing due dates of your bills causes you to rack up late fees, and that takes your credit, which again, causes more problems. So the action step here is to be proactive about staying on top of your bill due dates. You might enter them in a spreadsheet. That’s something that I’ve done for many years. I just have a list of all the bills that I owe balances, the payment amounts, the due dates. And it’s just something I refer back to if I want to remember, okay, what’s the interest rate I’m paying on this?

Or what’s the monthly payment or what’s the due date. It’s all right there in one centralized document. So you might enter all of that in a spreadsheet or, you know, due dates in your calendar or centralize them all in your bank’s online bill pay center. I do that as well. It’s really helpful. You can contact your creditors to discuss any financial hardship that you might be dealing with right now and ask them for help. If you’re not making your due dates, you may be able to work out a payment plan and that will help you get caught up with overdue balances or have any late fees waived. All right, the third sign that you may have too much debt is that you only pay the minimum on your credit cards. If you are stuck in a cycle of only paying the minimum on your credit cards each month, that indicates that you’re carrying too much credit card debt.

As I previously mentioned, as the interest accrues, you might end up paying literally double or triple the original cost of any item that you charged. For example, let’s say that you’ve got a $5,000 balance on a credit card that charges 18%, the minimum payment on that would probably be about a hundred dollars a month. And if you only paid that it would take you more than 30 years to pay off the card. And that’s, if you didn’t add any additional charges to the account, now, if you paid more, if you paid $250 per month, you would pay off the balance and less than nine years. And if you went ahead and paid 500 a month, that would wipe out the debt in just over four years. So again, these pay off timeframes assume that you don’t increase your credit card balance with any additional charges. Uh, you know, I give you that example, just so you understand that if you are only making the minimum payment on your car and you are really not getting ahead, the action step here is to make a plan, to stop making new charges and pay as much as possible on your credit cards each month to get out of credit card debt as quickly as well.

Yeah.

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Slash money. Girl, sign number four, your credit cards are maxed out.

So if you’re using credit cards to satisfy a shopping habit or to buy necessities during a financial patch, you’re going to eventually hit your credit limit. And that not only hurts your credit, but it may cause you to incur fees. If you go over your credit limit on the card, and even if you’re paying more than the minimum payment each month, having a maxed-out card causes your credit utilization ratio to skyrocket, which kills your credit scores. So if you’re consistently using more than about 20%, I would say 30% at the very, very, most of your credit lines, you probably have a debt problem to tackle. Ideally, you want to keep your balance on any card below 20% of your available credit limit. So the action step here is to stop making charges, or maybe you’re even getting some expensive cash advances on those maxed-out cards. You want to start making higher payments than the monthly minimum each year.

You don’t have any savings. If you don’t have a cash reserve, any unexpected expense could send you into a tailspin that causes you to go further into debt. So having some amount of savings is a critical way to avoid getting into debt in the first place. The action step here is to make a plan to radically cut your expenses and begin setting aside as much as possible each month in an emergency fund. You want to put that in an FDI C insured bank account start small, maybe set aside 1% of your income until you have several months worth of living expenses in the bank. He will be so happy that you sign number five.

Do that sign. Number six, you got turned down for new credit. Let’s say you recently applied for something, whether it’s a credit card or a loan, and you got denied credit. That means you probably have low credit scores. Poor credit can result from one or many factors such as having late payments in your credit reports. Having judgments, liens, too little credit history, or too much debt. If you want to learn more about credit, you might want to check out seven essential rules to build credit fast. That’s a podcast in the archive that will help you learn how credit scores get calculated and some really important tips to raise them. So an action step here is to use a free site such as credit karma, or annual credit report.com to review your credit reports. Make sure there aren’t any errors that are hurting your scores. And also a site flight credit karma will give you tips on how to improve those.

Sign.

Number seven, you’ve lied about your finances. If you’re lying to family or friends about your spending habits or how much debt you have, you probably know there’s a severe problem that you need to handle. If you’re worried, you’re losing and you’re having trouble concentrating due to your debt, it’s time to take action. So here’s what to do, create and stick to a realistic budget, or get help from a debt counselor or a financial planner. The national foundation for credit counseling@nfcc.org is a great resource to find help. And my last sign number eight, your debt to income ratio is too high. Your debt to income ratio or DTI is a crucial formula that lenders use to evaluate you. And you can use it to even if you don’t plan on taking out a large loan anytime soon, calculating your DTI is an excellent way to monitor your financial health over time.

So the action step here is to figure your DTI by adding up your total monthly debt payments. So you want to add up all your credit cards, loans, your rent or mortgage payment, and then divide that by your gross or pre-tax monthly income. And by the way, if you don’t want to start from scratch, I created a handy one page Excel calculator for you to make this a whole lot easier. You can download my debt ratio calculator for free by sending me a quick text message, just text the phrase, my debt with no spaces. So M Y D E B T, send that to the number three, three, four, four, four, and you will get the calculator right away. It’s a free tool and it will prompt you to list out all your debts and your income sources. It will automatically calculate your DTI and show you how your number measures up.

I’ll give you a quick example. Let’s say your monthly income is $5,000 and your debt is $2,500. Then your DTI is 50%. That’s 2,500 divided by 5,000 gives you 0.5, which is a high DTI. So the bottom line is that lenders have guidelines for how much debt borrowers should have. And it’s going to vary depending on the lender and the type of loan you’re looking for. But if you’re looking for a home loan, a typical requirement is that your payment should not exceed about 30% of your monthly gross income. Most mortgage lenders require that your house payment would not exceed about 30% and your total debt, including the new mortgage payment. Shouldn’t add up to more than about 40% of your gross income. So if you have a high DTI, you want to work on paying off your debt by cutting expenses, increasing your income, or ideally doing both.

Additionally, paying down your outstanding debt balances, boost your credit. And that may allow you to qualify for some debt optimization tools, such as a balance transfer credit card, or even a low interest personal loan. The good news is that it’s never too late to turn around your finances. If you recognize these debt warning signs, the best way to improve any money problem is to be brave and to face it head on denying a debt problem only makes it worse. So the sooner you address it and take these recommended action steps, the sooner you’re going to make positive financial changes, thanks for being a part of the money girl, community. If you would like to get more information from me, I send out a short, weekly email that’s filled with all kinds of different tips and tools that I think you’ll enjoy for saving more growing your money and becoming an amazing money manager.

If you’d like to get that, you can text, get updates with no space to the number three, three, four, four, four, or you can visit Laura D adams.com and sign up for the newsletter there. And if you’re not into email, another great way to stay in touch is to join my private Facebook group called dominate your dollars. You can search for it on Facebook or text dollars, two three, three, four, four, four, and I’ll send you an invitation to the group. I hope to see you there. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve Ricky Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, please rate and review it on Apple podcasts or wherever you get your shows, new episodes are released every week.

Wednesday, and when you’re subscribed, you get them automatically for free. So be sure to subscribe. And you might also like the backlist episodes and show notes that are always available@quickanddirtytips.com.

Debt is a powerful tool that can boost your success or cause your financial life to crash and burn. The trick to using debt wisely is knowing the difference between good and bad debt and the right amounts based on your income and goals.

Today, I’ll cover tips to use debt strategically, so it helps not hurts you. Plus, you’ll learn eight ways to know if you have too much debt and action steps to protect your finances.

Debt is a complex topic because people have different opinions about it. Some insist that no amount of debt is acceptable, not even a home mortgage. Others acknowledge that some debts, such as a mortgage or student loans, are OK but using a credit card or taking out a car loan is a mistake. There’s a camp that believes using debt to purchase anything is acceptable as long as you can afford the payments.

My recommendation is that you should consider going into debt when:

  • You’re confident that it will give you a financial return.
  • You have a steady income or ample savings to repay it on time.
  • You qualify for a competitive interest rate and terms.

For example, if you buy an affordable home with a low-rate mortgage, you can build equity over time. As you pay down the principal balance and/or your home value appreciates, you build wealth. That’s why financing a home is generally considered good debt.

Additionally, mortgage interest rates are at historic lows. They also come with an interest tax deduction, making home loans cost even less on an after-tax basis. Depending on where you live, buying a home may be less expensive than renting a similar property, especially outside of large cities.

Another example of good debt is a reasonable amount of student loans. Interest rates vary depending on whether you have a federal or private loan; however, they typically have relatively low-interest rates.

Plus, some amount of interest paid on education debt is tax-deductible, which further reduces the cost. And best of all, getting an education gives you the ability to earn more over your lifetime.

What debt should you avoid?

The problem with taking on too much debt is that it can hold you back from accomplishing key objectives, such as building an emergency fund, investing for retirement, or reaching other financial dreams. So even for good debts, such as a home or education loan, it’s important to maintain reasonable levels based on your current or expected future income.

The takeaway is that you shouldn’t go into debt for something that doesn’t give you a financial return. For instance, financing consumer goods or vacations cause you to lose wealth, not build it.

Add high-rate credit card interest on top, and you have a potential financial disaster. If it takes years to pay off a luxury item charged on a credit card, it could end up costing double or triple the original price.

8 signs of too much debt and actions to take

Here are eight warning signs that you may have too much debt and action steps to get it under control.

1. You’re unsure how much debt you have

If you don’t know how many or how much total debt you have, you’re not taking care of your financial health. Staying aware of your accounts and debt balances is the first step to getting them under control and improving your entire financial life.

Take action

Get organized by creating a spreadsheet listing each account name, number, interest rate, and amount owed. Then sort your debts from highest to lowest interest rate.

In general, that’s the best way to tackle debt because it saves the most interest, which you can use to pay down more debt. However, if you have a small debt with a low-interest rate that you want to crush first, go for it!

2. You avoid looking at your bills

If you’re afraid to open your paper or e-bills because you don’t want to see the balances, remember that hiding from a financial problem doesn’t make it go away. Missing due dates causes you to rack up late fees and your credit scores to drop, which causes more money problems.

Take action

Be proactive about staying on top of your bill due dates. You might enter them in a spreadsheet, in your calendar, or centralize them in your bank’s online bill pay center.

Contact your creditors to discuss any financial hardship and ask for their help. You may be able to work out a payment plan to get caught up with overdue balances or have late fees waived.

3. You only pay the minimum on credit cards

If you’re stuck in a cycle of only paying the minimum on your credit cards each month, that indicates you’re carrying too much debt. As previously mentioned, as interest accrues, you could end up paying double or triple the original cost of the items you charged.

For example, say you have a $5,000 balance on a card that charges 18% APR. If you only paid the $100 minimum, it would take you more than 30 years to pay it off! If you paid $250 per month, you’d pay off the balance in less than nine years.

And paying $500 would wipe out eliminate the debt in just over four years. These pay-off time frames assume that you don’t increase credit card balances with any additional charges.

Take action

Make a plan to stop making new charges and pay as much as possible on credit cards each month to get out of debt as quickly as possible.

4. Your credit cards are maxed out

If you’re using credit cards to satisfy a shopping habit or buy necessities during a rough financial patch, you’ll eventually hit your credit limit. That hurts your credit and may cause you to incur fees if you go over your credit limit.

Even if you pay more than the minimum, having a maxed-out card causes your credit utilization ratio to skyrocket, killing your credit scores. If you’re consistently using more than 20% to 30% of your credit lines, you probably have a debt problem to tackle.

Take action

Stop making charges or getting expensive cash advances on maxed-out cards and start making higher payments than the monthly minimum.

5. You don’t have savings

If you don’t have a cash reserve, any unexpected expense could send you into a tailspin that causes you to go further into debt. Having some amount of savings is a critical way to avoid getting into debt in the first place.

Take action

Make a plan to radically cut your expenses and begin setting aside as much as possible each month in an emergency fund at an FDIC-insured bank. Start small by setting aside 1% of your income until you have several months’ worth of living expenses in the bank.

6. You got turned down for new credit

If you recently got denied credit, you probably have low credit scores. Poor credit can result from one or many factors, such as having late payments, judgments, liens, too little credit history, or too much debt. Check out 7 Essential Rules to Build Credit Fast to learn how credit scores get calculated and tips to raise them.

Take action

Use a free site such as Credit Karma or AnnualCreditReport.com to review your credit reports and make sure there aren’t any errors hurting your scores.

7. You’ve lied about your finances

If you’re lying to family or friends about your spending habits or how much debt you have, you probably know there’s a severe problem that you need to handle. If you’re worried, losing sleep, and having trouble concentrating due to debt, it’s time to take action.

Take action

Create and stick to a realistic budget or get help from a debt counselor or financial planner. The National Foundation for Credit Counseling is a great resource to find help.

8. Your debt-to-income (DTI) ratio is too high

Your DTI is a crucial ratio that lenders use to evaluate you, and you can use it, too. Even if you don’t plan on taking out a large loan anytime soon, calculating your DTI is an excellent way to monitor your financial health over time.

Take action

Figure your DTI by adding up your total monthly debt payments—including credit cards, loans, and your rent or mortgage payment—and dividing that amount by your gross (pre-tax) monthly income. For example, if your monthly income is $5,000 and your debt is $2,500, your DTI is 50% ($2,500 / $5,000 = 0.5).

Most mortgage lenders require that your house payment wouldn’t exceed about 30% of your monthly gross income. Your total debt, including the new mortgage payment, shouldn’t add up to more than about 40% of your gross income.

If you have a high DTI, work on paying off your debt by cutting expenses, increasing your income, or doing both. Additionally, paying down your outstanding debt balances boosts your credit. That may allow you to qualify for debt optimization tools, such as a balance transfer credit card or a low-interest personal loan.

The good news is that it’s never too late to turn around your finances if you recognize these debt warning signs. The best way to improve any money problem is to be brave and face it head-on. Denying a debt problem only makes it worse. So, the sooner you address it and take these recommended action steps, the sooner you’ll make positive financial changes.

This article originally appeared on Quick and Dirty Tips

 

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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