independent financial guidance

.co.uk

how much debt is too much for a person

—

by

Wojciech
in
Wojciech

Wojciech

Diploma for Financial Advisers
Diploma in Accounting
Member of London Institute of Banking and Finance

Managing debt is part of life for most people, whether it’s a mortgage, car loan, or credit card payments. But how much debt is too much for a person? Understanding this can help you avoid financial stress and stay in control of your finances.

What Is Debt-to-Income Ratio (DTI)?

One key way to determine if you have too much debt is by calculating your debt-to-income ratio (DTI). This measures how much of your monthly income goes toward paying off debts. A healthy DTI is typically below 35-40%.

Example of How DTI Works

Let’s say you pay £800 a month on your mortgage, £300 on your car loan, £200 on credit cards, and £200 on personal loans. Your total monthly debt is £1,500.

If your gross monthly income is £4,000, you can calculate your DTI like this:

Recurring debt (£1,500) ÷ gross monthly income (£4,000) = 0.375 or 37.5%.

A DTI of 37.5% is on the higher end of what’s considered manageable. Ideally, you should aim for a DTI below 35% to give yourself more breathing room.

Signs You May Have Too Much Debt

Here are some indicators that your debt might be unmanageable:

  1. You Struggle to Pay Bills on Time: Constantly juggling due dates can indicate that your debt load is too high.
  2. Minimum Payments Are All You Can Afford: Paying just the minimum on credit cards can keep you stuck in debt longer.
  3. No Savings or Emergency Fund: If debt payments take up all your income, you might be at risk in case of unexpected expenses.
  4. You’re Relying on Credit for Necessities: Using credit for basic needs like food and utilities is a major warning sign.

Stay Ahead in Finance – Join Our Exclusive Newsletter!

Newsletter slim mid article

How to Manage Your Debt

If your DTI is too high or you’re feeling overwhelmed, take action to regain control:

  1. Track Your Spending: Write down every expense to see where your money is going.
  2. Set a Budget: Prioritise essential costs like housing and food, then allocate funds to pay off debts.
  3. Focus on High-Interest Debt: Pay down high-interest debts, like credit cards, first to reduce long-term costs.
  4. Consider Debt Consolidation: Combining debts into one lower-interest loan can simplify payments.
  5. Seek Help: Services like StepChange or Citizens Advice in the UK can provide free advice and support.

The Bottom Line

Debt isn’t necessarily bad—it can help you achieve goals like buying a home or furthering your education. But when debt becomes unmanageable, it can lead to stress and financial hardship.

By keeping your DTI below 35%, managing your expenses, and addressing financial issues early, you can enjoy a healthier financial future.

How Much Debt Is Too Much for a Person?

The answer lies in maintaining balance. Calculate your DTI regularly, plan your budget wisely, and make informed financial decisions to keep debt under control. Remember, the goal is to use debt as a tool, not let it rule your life.

Feel free to share this article