Do You Need To Downsize Your Debt?

Posted in Debt Help
Posted by Ted Michalos, BA, CPA - LIT

too-much-debt-king-updatedThere is an old saying in the financial world that “Cash is King”.  Respectfully, that’s wrong.  Debt is King because it has the potential to dominate your life.

How Much is Too Much?

Let’s look at an average person – their income is likely in the mid $40’s producing take home pay of around $3,000 per month.  To keep this simple, they rent and only have one credit card with a $5,000 limit.  If the card is maxed out then their minimum monthly payment is going to be around $150.  Although paying high interest on credit card debt is not a wise financial choice, for this person managing their debt load is not a problem.

Let’s up the limit on their card to $10,000.  The minimum payment is now $300 and I expect keeping up with their debt payments still isn’t a major concern.

Add a second card at $10,000.  Minimum payments now run $600 and take up 20% of their take home pay.  At this point most people would start to worry.

Third card at $10,000.  Minimum payments now run $750 and 25% of their pay.  Total debt is now $30,000 and they earn $36,000 net annually.  They have a problem and it is getting out of control.

Add a fourth, fifth, six card.  Instead of credit cards we could substitute a line of credit or a personal loan, income taxes or any other type of debt.  I hope you can see where this is leading…

Limit Your Access To Credit

Here’s the question I’d like you ask yourself, “How many cards do you have in your wallet?”  If you have more than one, or perhaps two, then what I described above can easily happen to you.

The best way to protect yourself from too much debt is to limit your access to credit.  When my average person had only one credit card they couldn’t get into trouble.  When they had access to credit equal to more than half of their annual take home pay then things got tight – every level of credit beyond that just created a bigger and bigger problem.

Reduce Your Debt

If you already have accumulated too much debt then you need to take positive steps to downsize your debt to more manageable levels.  You can start by taking stock of just where you are at. Make a list of what you owe, the interest rate, and the minimum monthly payment.  Then decide on a debt repayment strategy that works for you.

Some people pay off the smallest debts first so they can drop items form their list quickly.  Others pay off the highest interest rate items first in order to save money.  Still others move balances around to try and transfer higher interest debt to lower interest credit.  All of these strategies are valid as long as you are disciplined enough to stick to your plan.

If the prospect of downsizing your debt is too intimidating then consider asking for some assistance. Debt is not something that you can ignore – it won’t go away by itself and if you aren’t careful is can dominate your life.   Don’t let that happen to you.