Staying Out of Debt

Learn tips for how to stay out of debt, as well as topics like debt consolidation, in this free lesson.

How much debt is too much debt?

man paying bills at desk

At some point in your life, it's likely that you'll have debt. But how do you know if you have too much debt? On average, your annual debt payments—including car payments, credit cards, and bank loans—should ideally be no more than 20 percent of your annual take-home income. (This 20 percent debt guideline does not include rent or mortgage costs, which can be 30 percent on their own).

Example: Michael's annual take-home income is $30,000. Does he carry a reasonable amount of debt?

To calculate whether he falls under or at the 20 percent limit:

  1. List monthly debt payments. $250 car payment, credit card payments of $60 and $50 each, and $120 student loan payment.
  2. Add up all debt payments for one month, then multiply by 12 to find how much is spent annually. Michael's total monthly debt payment is $480, or $5,760 annually.
  3. Calculate whether debt payments exceed 20 percent of annual take-home pay. To calculate 20 percent of his take-home pay, Michael multiplies 0.20 by $30,000 to get $6,000.

Michael's annual debt payments of $5,760 do not exceed the recommended 20 percent limit for his income of $6,000. However, he probably shouldn't take on any more debt if he can avoid it.

To help you determine your debt, use our Debt Worksheet.