Too Much Debt and Not Enough Money

Ordinary expenses like gasoline and groceries have gone up over the past several months. For those individuals and families that carry little to no debt, the biggest change has been less money left over monthly to be put toward savings or investments. High debt holders, on the contrary, now have less money to pay down debt and may be surviving on credit. Unable to live off of the monthly income made or find a way to increase monthly income, debt will continue to grow. Resultantly, high debt holders will see an increase in their debt-to-income ratio.

Debt-to-Income Ratio

A healthy debt-to-income ratio is paramount when seeking a loan or extension of credit. This ratio can be calculated by dividing your monthly debt payments by your monthly income prior to taxes (debt-to-income ratio = monthly debt payments/monthly gross income). When the debt-to-income ratio is too high, your income must go toward paying off debt. In addition, you may be precluded from getting approval on a mortgage or be forced into a more expensive home loan. Because you will be seen as a riskier prospect when borrowing, loans and credit cards may be assigned higher interest rates, and you may be subject to stricter terms on late or missed payments.

Do I Have Too Much Debt?

If your debt balance is not going down despite regular payments, or if you are living paycheck to paycheck without any money left at month-end for savings, or if you are using credit cards for cash advances, you may have a debt problem. Lack of money can lead to late payments, increased emotional stress, and put your household at risk of acquiring more debt in the event of a financial emergency.  Because high amounts of debt can affect your home life and your work performance, it is worthwhile to set limits for yourself and to seek help from a nonprofit credit counseling agency if necessary.

Getting Out of Debt

Paying down debt may, at first, seem impossible, but you need to know that you can get out of debt and improve your finances.  The tactics you will need will vary depending on your personal financial situation and your motivation. Find out how much you owe and establish a budget. Of course, reducing monthly expenses or increasing your income would be the best scenario, but may not be realistic. Another tactic is to avoid taking on additional debt.

The debt snowball and the debt avalanche methods are two repayment strategies. The debt snowball method entails making payments on the smallest debts first, while covering only the minimum payments on larger debts. With the debt avalanche method, debts with the highest interest rates are paid first, while only minimum payments are made on other debts. Another useful method is debt consolidation. Minimizing the number of bills to keep track of debt can make it easier to manage. And debt consolidation may enable you to obtain a more favorable interest rate.

Building financial security and saving money over the long term is possible when you reduce your debt. Accordingly, try to learn as much as you can about your finances, and establish personal boundaries around household spending.