With all the talk of the United States government considering a raise to the federal debt limit, it should give Americans the opportunity and desire to revisit their own debt limits.
Personal Debt Limit
So the question then becomes, what is your family’s debt limit and should you ever go past it into uncharted territory?
A debt limit lets you know just how much money you owe to someone else. Some people just look at personal loans, credit cards and car loans when they calculate this figure. Others include their mortgage as well.
No matter what you consider to be your debt, there should be a limit to how much you can owe. This prevents you from getting in over your head and owing more than you can ever pay back.
Each individual and family needs to determine their own debt limit. For two people with the exact same expenses and the exact same income, they may end up with differing limits.
Part of the calculation is numbers and figures and the other part is just a person’s peace of mind.
Look at the amount of income that you receive per year. Look at the expenses that you cannot live without. These include items such as rent or a mortgage, food, utilities, etc.
From here, look at the amount that you already owe and how much you are paying per month to pay off the debt. Can you afford to make any more payments?
When you begin to figure your own debt limit or ceiling, you look to see how much you are paying per month on credit cards. One of the problems with this number is that it is constantly changing.
You may be paying $100 per month now, but after just one late payment or underpayment, you could be in over your head with late fees as well as a rising interest rate.
As you look into your current debt situation, it is important to prioritize your debts. If you already have a credit card and you want to obtain another, do you mind running the risk of not being able to pay for the first one? For many people, this exact scenario takes place.
When prioritizing, if you want to add more debt, consider paying something off first. This ensures that you don’t go over your debt limit and you stay within your means.
Everyone has those times when an emergency knocks them down. They have the best plans in the world, but there is no way around picking up some debt along the way.
In this case, be sure to shop around for the best rates and the best incentives if you are planning to apply for another credit card.
You want to get the most out of the debt as you can. Do your best to charge only the necessities during this time and as soon as possible, pay down balances until you are once again down to your previous debt limit.
Sticking within your debt limit will give you peace of mind, knowing that you are living within your income and have room to adjust should circumstances change for the worse.
Guest post by MSM
I think establishing a personal debt limit is the first step towards responsibly budgeting with your finances. It is easy to get in over your head when taking on credit cards, mortgages, and other financial obligations. Having a clear set plan is the best way to manage these situations successfully so that you can continue to meet monetary goals in the future.
I dont have a personal debt limit, but I’m sure that it should vary with age – like when I graduated school, I had debt 2x my annual income – and I didnt own a house! Now, with income increases and hard work paying it down, I have debt at about half my annual income.
Having a personal debt limit should be part of each individual’s finances so that we don’t get deeply into debt and ensure that we don’t get past that limit.I think it is very easy to fall into a trap of “I’ll do it just this time” and next thing you know, we are drowning in debt!
Wouldn’t the banks stop individuals from going beyond their debt limit?
It would be bad for your credit score if you go anywhere near your limit, and that would put pressure on your car loan and mortgage rates.
Comes a point when going past your personal debt limit will be hazardous to your health. By that time, you’re dealing with ill-tempered fat guys in shiny jogging suits.
There are only two acceptable debts, otherwise all personal debt limits should be $0.
1. Home loan – Should not exceed 1 years salary. If you want to go above that, then keep saving first. Or buy a smaller house, condo, or RV.
2. College Loan – and only for a discipline where a college degree is required. If you’re going to study Anthropology, please don’t waste your money and time, and just start reading books on the subject. Better yet, get a degree that might actually offer a related job when you’re complete.
Any other debt is avoidable and should be avoided at all costs. Need a car? Move closer to work. Need new clothes? Probably not.
Timely post as everyone is glued to the debt ceiling debate. I don’t have one as I pay my monthly bills on time. It’s good practice so one doesn’t get buried in debt.
I agree this is a timely post. With all the issues of debt and credit in the news, I am really starting to examine my own finances with the goal to eventually get out of debt entirely including my mortgage. It will take some effort but my wife and I are starting to get really motivated.
Our debt limit is whatever it is today. In other words, we only want it to go down from here.
Good article. If only our government would listen to your words, but we know they are not.
A personal debt limit is a great thing to have. Currently, I am above mine and don’t want any more debt in my life. I am focused on getting my debt levels down, but am really bummed I owe more on my home than it is worth.
Only time will get me out of that balance, but this is the reality for many americans. We just have to buckle up and make it happen!
Our personal debt limit has pretty much always just been our primary real estate; aside from that, no debt is acceptable unless it’s producing a return like rental real estate.
I don’t think so….maybe a debt limit on non-collateralized debt such as credit cards or purely expense items, such as car loans.But debt limits with collateralized debt could be limiting.I’d love to have $100 million in debt right now related to apartment buildings that I owned.Any amount of credit card debt (that isn’t being paid off this month) is bad. On the other hand, business debt, real estate debt, and other debt could be in the long term best interest.
Other than a 15 year home mortgage I would encourage readers to set their debt limit to what it is today AND to lower that limit every month.