3 reminders for a healthy debt level
The simple combination of three vowels – IOU – can spark a complex reaction, often with varying levels of anxiety.
When you hear the word “debt,” the associations that first come to mind may be burdensome, constricting, or negative. But upon further consideration you may also acknowledge – from your experience or from those close to you – that a responsible, well-managed level of debt can open doors for consumers (and small businesses). It may also help with liquidity in times of need or help you reach certain lifestyle or financial goals.
In fact, some people derive a sense of accomplishment from maintaining a good credit score through well-balanced borrowing.
To help maintain a healthy level of debt, I like to keep these three reminders handy:
- Manage your credit like you manage your health: Just as you balance lifestyle, nutrition, and fitness goals to maintain your physical health, your credit is a key component of your total well-being. As with nutrition, there are healthy and unhealthy foods, so too there is good debt and unhealthy debt.
- Not all debt is bad debt: Evaluate carefully if taking on a responsible level of debt could be beneficial to your financial health. For example, a debt-free person who rents month-to-month instead of purchasing a home may miss out on the opportunity to grow his wealth through asset appreciation—not to mention the home-ownership tax breaks. (NOTE: Consult a tax professional for guidance that fits with your situation.)
- Keep debt payments under 40% of after-tax income: Well-managed, responsible credit can allow you to finance large important purchases, which support your personal goals, ambitions and lifestyle. Here’s a simple guideline that may help: Minimize long-term revolving credit card debt and keep debt payments—including those related to the primary residence—to less than 40% of after-tax income.
Of course it’s always a good idea to discuss any major debt or credit decisions with a financial professional first, if possible. The added perspective may boost your peace of mind.