How Much Debt Can You Handle?

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How Much Debt Can You Handle?

If you feel that you have too much debt, you are not alone.

Debt is very common

Most people have substantial debt; many have more than they can handle. However, debt is not all bad. Sometimes it makes sense to use borrowed money for investments. However, most folks are not using debt in that way; they are using it to make ordinary purchases of things they would probably be better off without, anyway. Sometimes in our competitive society, spending has become a status symbol. This can encourage people to spend more than they should—more than they have. Consequently, they run up tremendous debt.

While some debt is okay, too much debt is not. So, how do you know whether you have too much debt or not? First let’s look at the different kinds of debt we might incur.

Two kinds of debt

First, there is investment debt, such as the debt incurred to buy a home (mortgage) or to start a business. Generally this kind of debt is used to purchase assets that, when liquidated, will provide cash to repay the debt, or will provide income or have use value over the life of the loan that offsets the debt repayments. For example, if you borrow money to buy a house, you will have the use of the house that offsets any rent payments you might have had to pay for other shelter.

Consumer debt is the borrowing of money to buy things that decrease in value with use or over time. If you borrow money to buy a car, clothing, holiday gifts, etc., you are using consumer debt. Consumer goods generally become worth less over time or with use. They are consumed. But the debt remains.