By: Dan Cavalli Business and Money Strategist
When thinking about personal debt, most people think in terms of monthly payments. They will consider making a large purchase if the monthly payment seems affordable. Fifty dollars a month might not sound bad on the showroom floor, but even a small amount can have far reaching consequences if the debt overextends the debtor.
How about you? Can you afford any more debt? The answer may be as easy as a simple yes or no. More than 40% of debtors spend more than they have coming in. How is this possible? Many don’t even realize what they are spending. They know they don’t have grocery money and that their bills aren’t getting paid on time. However, many do not realize that they are steadily falling behind until it is too late. Before you will know if you can afford more debt, you need to know how much personal debt you have now. Take out all of your bills and add them up. Be sure to include utility bills, insurance payments, groceries, splurges, etc.
Write down everything that you spend and subtract it from your net income. If you spend more than 60% of your net income, you cannot afford more debt. If more than 38% of your monthly payments go to creditors, you cannot afford more debt. Another huge consideration to make is the economy.
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The above numbers are ideal in an ideal economy. Special allowances should be made for the current state of affairs. Jobs are being lost every day. People who are able to keep their jobs are making less. Incomes are actually shrinking in many sectors. You need to be able to absorb this shrinkage if it happens to you. So, make some economical concessions. Try to spend no more than 50% of your net income. Put the extra money into an easily accessible account. If you lose your income, you will have something to fall back on. You should also consider your individual circumstances. How slippery is your financial standing?
If there are talks of layoffs at work, you are not standing on solid ground. If your home needs major repairs, you should not be buying a new car. Be reasonable. Consider everything. One extra $50 payment every month could push you over the edge. Take a good look around you. How is your life? Most of the time people finance wants instead of needs. If you want something, save up for it. If you really, really need it and your financial standing is good, finance it. Remember: keep the economy at the forefront of your personal debt decisions.
You have to consider more than your own actions before you accept more debt. You have to realize that there may be circumstances beyond your control that make it difficult for you to make ends meet.
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About Dan Cavalli He learned financial fitness firsthand. In 1995, he started his first national business with nothing, but grew it to more than 35,000 customers and $140 million in revenue in less than 18 months. “The Financial Review," Australia's leading business newspaper named Cavalli as one of the country's “Internet’s Untold Millionaires." More recently, Cavalli's mission has shifted to helping others achieve similar success. He is the author of the internationally sold financial book, "Blueprint for Making Millions."