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How do I know I have too much debt?

I saw a commercial recently with two neighbor’s chatting in the front yard. One had large numbers tucked under his arm representing his savings plan. The other neighbor, clipping the hedge had the number "gazillion" under his. The "responsible" neighbor asked him,

"How much money are you going to need to retire comfortably?"

The hedge clipping neighbor responded

"A gazillion dollars". Neighbor one asked him, "How much are you putting away for retirement?" Neighbor two responded "I dunno, I just throw a bunch of money at it and hope for the best."

Neighbor two's situation, surprisingly, is a lot more common a scenario then one might think. CBC's Metro morning ran a feature February 13, on the surprising number of people in the greater Toronto area who have full time jobs, but are still living in the poverty range.

http://www.cbc.ca/metromorning/episodes/2012/02/14/working-poor/

Let's run some numbers and see where you compare?

How much debt is too much debt?

Let's assume you are making 65,000 a year. Depending on where you live, the government may take approximately half of that in taxes.

Let's now assume you have a monthly take home of 3000.

Your mortgage (or rent) is 1400.00 per month.

Let's also allow for high interest debts (credit cards, car loans, personal loans etc.) of 3000.00 in total.

If we run all of this through a debt calculator, we see your estimated monthly loan repayments are $1,490 which equates to 49.7% of your disposable monthly income. You will find this is a dangerously high ratio. Most likely, running these numbers, you'll find you're also spending about 3% of your disposable income just servicing short-term debt.

What does this all mean? If you lose your job the amount of time you'll have to recover before debt catastrophe is only a few months.

Furthermore, you'll have a difficult time putting anything away for a rainy day, let alone retirement with this high a debt servicing to income ratio.

What's the solution?

You'll either need to increase your monthly after taxes income, or receive a low interest loan from a family member or close friend.

Is Your Mortgage coming due?

With interest rates as low as they are, this can present a huge opportunity. Merge outstanding high or medium interest debts into your mortgage and pay them off over a longer period of time, at a lower interest rate.

For more money saving tips go to PrudentFinancial.net

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