Personal & Household Budgeting Tips for a Secure Financial Future

Your Debt - What's the Right Amount of Debt?

The right amount of debt for you may not be the right amount for me, but when looking at your debt you should always consider a few good debt guidelines.

Of course, credit card companies and other lenders are happy to lend as much money as they think you will repay. Yes, they take risks, but those are calculated risks. They first consider default rates, current interest rates and carefully review credit history when they make loans. You and your debt can benefit by following a few of their strategies.

Before taking out new credit, consider the odds that you will have to default on repayment. Don't factor in to your decision the possibility of deliberately defaulting or filing bankruptcy. You'll find the consequences are rarely worth it and that should be reserved as a very last resort.

Factor in expected income increases. This is what banks and other business do. But you should be very sure you're actually going to receive it. The promise of a raise or hoping you might receive income from a stock sale is far from guaranteed money. It's not real until it happens.

You can make intelligent predictions about where interest rates are headed by looking at the current interest rates, which is what businesses do. That's a very difficult thing to be confident about, but general trends are not random. Look at bonds, futures and other indicators. If 6% bond option prices are going down, then the experts are betting interest rates will rise to above that in the future. These represent the bets of professionals about the future direction of inflation and interest rates.

At the same time take a look at your own credit history the same way a bank would and try to see it from their perspective. If you were a bank would you loan yourself $10,000 at 7% for 48 months? Never rationalize late payments or defaults. You may not yet have developed the resources or had a valid reason (inner and financial) to repay all your debts on time.

Consider your total income and expenses realistically. You might really want a new car, but do you really need a new care at an extra $300 per month. In order to pay for that new car you may have to sacrifice essentials while still meeting your current obligations? Always be honest with yourself.

No one can decide for you whether it's worth taking on a $200 monthly payment on your credit card at 12% for something you've been wanting to buy. It may very well be worth it to you but it's also worth it to you to think about it for awhile. Financially speaking, buying on impulse is the most common way credit card users get in over their heads.

Always consider the possibility that if you waited and saved perhaps for a year or whatever is appropriate, you will not only have the item but perhaps something else you could purchase with the money you would have saved in interest.

Avoiding the fact that you can't really afford the payments is the surest way to get into financial trouble and it can take months or years to recover. Be realistic and think long term. This will give you the best chance to decide what is really the right amount of debt for you.