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Do you have too much debt? The total debt you owe compared to your total income can help in answering this question and also understand whether it is a good or bad sign. For instance, debt greater than 40% of your yearly income can be tough to manage.
It may result in a situation where you cannot keep up with the repayments. If such a situation arises, it’s time to assess how much you owe and understand how you can pay off the entire debt.
What’s good debt?
If the ongoing interest rates are low and are mostly fixed, and you have borrowed a loan to buy something whose value is expected to grow, like a house, business, etc, it’s considered good debt.
What’s bad debt?
Loans that come with high or variable interest rates and are mostly used to buy things that may end up losing value or could get used up are examples of bad debt. Some examples include high-interest personal loans for expenses like vacations. Also, high-interest credit card debt.
Common warning signs of debt problems
Some of the common signals that reflect a problem with your existing debt are:
- The debt balance is not reducing despite regular repayments.
- Your income is exactly equal to your expenses and there are no monthly savings.
- You’re not able to contribute to an employer-sponsored retirement plan since you do not have enough money.
- Lack of an emergency fund for any urgent financial needs.
- You mostly use credit cards for cash advances.
Bad debt can cause more problems in the long run and therefore, it is important to look at the factors mentioned above to plan out debt usage.