These days, as my virtual mailbag fills with messages and pleas for help, I’m noticing a decided increase in those that are related to debt. I pulled out a couple to share with you today.
Dear Mary: Is it ever OK to have debt? How much debt can I afford? — DeannaDear Deanna: Sure, it is OK, under the right reasonable and safe conditions. After all, not many of us could be homeowners or purchase a car without a mortgage or financing of some kind. These days, it’s difficult to finish a college education without incurring some amount of student debt. But there needs to be self-imposed limits and boundaries.Mortgage debt: Your monthly mortgage payment — including principal, interest, real estate taxes, and homeowners insurance — should not exceed 30% of your gross monthly income (before taxes). This is called your housing expense ratio.Student debt: A good rule to follow is that your total student debt should not exceed the first year’s income in your chosen field of study.Auto debt: Your loan should be for no more than 36 months. With this kind of aggressive pay-back structure, you can be pretty sure your car won’t go upside down where it’s suddenly worth less than your outstanding debt. And you won’t get caught in the trap where you are still making payments and big repair bills at the same time. Stick to this rule and you’ll have time to save up for the next car.Credit card debt: It is never OK to have credit card debt. It’s just too expensive. If you are charging more than you can reasonably repay in that same month, you are overspending. That credit card is going to come back to bite you.Your total monthly debt obligation should not be more than 36% of your gross income. Total debt includes the mortgage payment plus other obligations such as car loans, child support and alimony, credit card bills, student loans and condominium association fees. This is known as your debt-to-income ratio.I hope this helps as you determine if debt has a place in your financial life, and if so, how to handle it responsibly so it makes your life better, not worse.Dear Mary: I am deeply in debt. I am borrowing and borrowing just to keep up with the debt payments. I am a bookkeeper at heart, so tracking my spending is not the problem. However, I’m wondering what you might say to encourage me on what to do or what step to take next. — HeleneDear Helene: It sounds to me that you are bleeding to death, financially speaking. I’ve been where you are (everydaycheapskate.com/about). I can identify with your situation and the pain you are experiencing. And I know this for certain: You cannot continue to pay your credit card bills with a credit card! That’s a game you can never win.Of course, I don’t know your specific situation, but I can tell you this: Drastic measures are the tourniquet you need now.You may need to move in with family members for a while and sell assets to pay down your debts so you can afford to make the payments without borrowing. You should consider taking on an additional job or working more overtime. Actually, you may need to do all of those things for a time.It occurs to me that you may be an excellent candidate for credit counseling. You could be connected with a reputable and trustworthy counselor who will go to your creditors on your behalf and set up a payment schedule you can handle. Getting your interest rates reduced could be part of such a plan.Your situation is not hopeless. There is a way out, I am confident of that!I hope that you will find the courage to do what may be very difficult right now but will eventually come back to bless you many times over: Go to NFCC.org and click on “find a counselor,” or pick up the phone and call 800-388-2227.The National Federation for Credit Counseling is a fine nonprofit organization you can trust. I highly recommend these good people.Got a question for Mary? You can send it to DearMary@everydaycheapskate.com. Selected questions will be answered in future columns.
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