How much money should you put in to get into debt?

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Almost all Americans are in debt, whether they’re paying for a house, a college degree, or a new laptop. And you’re not the only one wondering how much income should be allocated to paying off credit cards, car loans, student loans, and / or your mortgage each month?

As a general rule of thumb, a good rule of thumb to follow is to pay as much as you can each month over and above the minimum payment.

“This will not only help you pay off your debt sooner, but will also save you a significant amount of money in interest payments,” says Bola Sokunbi, certified financial education teacher and author of “Clever Girl Finance” .

Paying more than the minimum might seem like a no-brainer, but it’s a good habit to make if you have the extra cash. For more specific guidelines on paying off your debt, Select spoke with a few experts to get their best advice.

Follow the 50/30/20 rule

The 50/30/20 rule is a simple budget technique that divides your spending into three categories. It recommends that you spend up to 50% of your monthly after-tax income (i.e. net income) on essential expenses (“needs”) like your mortgage payment, utility bills, food. and transportation. The next 30% should be allocated to your “whims” (dining out, vacations, etc.), and the remaining 20% ​​goes towards your financial goals, whether it’s paying off debt or saving for life. ‘to come up.

Depending on the type of debt you have, it can fall into one of these three categories. Mortgages and auto payments, for example, fall into the “needs” category.

“You want to make sure that your monthly mortgage doesn’t exceed 28% of your gross monthly income,” Mark Reyes, CFP and Albert financial advice expert, told Select.

So if you bring home $ 5,000 (before taxes), your monthly mortgage payment shouldn’t be more than $ 1,400.

He recommends keeping your mortgage payment below 30% of your income so you have enough room for the rest of your needs.

If you have credit card debt, Bruce McClary, spokesperson for the National Foundation for Credit Counseling (NFCC) recommends that you prioritize credit card consolidation payments under the “needs” expense category. Carrying a credit card balance from month to month can be very taxing due to the high interest charges (usually double digits), so it’s important to pay it off as quickly as possible. .

For those who can’t afford to pay off their credit card balance in full, McClary advises working toward a goal of spending 10% of your income on that debt each month.

“Assuming your mortgage or rent is going to consume the lion’s share of that [“needs”] category, I recommend keeping credit card payments below 10% of your take-home monthly pay if you’re not able to afford your entire balance each month affordably, ”he says.

Make sure no more than 36% of monthly income is spent on debt

Financial institutions look at your debt ratio when considering approving you for new products, like personal loans or mortgages. To calculate this number, divide your gross monthly income (your total income before taxes or other deductions) by the total amount of your debts (mortgage, credit cards, student loans, and auto loan payments). Then multiply by 100 to get the percentage.

For example, let’s say your gross monthly income is $ 6,000 and you have $ 3,000 in debt repayment each month for your mortgage, car loan, and student loans. Your debt to income ratio is 33%.

“From a lender’s perspective, they generally don’t want more than 36% of their gross monthly income going to debt,” says Douglas Boneparth, CFP, president of Bone Fide Wealth and co-author of The Millennial Money Fix.

Don’t stress too much if your debt ratio is over 36% if you factor in your mortgage – you’re not alone. The data shows that consumers spend close to that just on non-mortgage debt.

The latest findings from Northwestern Mutual’s 2021 Planning and Progress Study reveal that among American adults aged 18 and over who are in debt, 30% of their monthly income on average is used to pay off debts other than mortgages. By far the main source of debt after mortgages is credit cards, more than double that of any other source of debt.

Like most rules of thumb when it comes to personal finance, Bonparth cautions that the amount you spend each month to pay off your debt is ultimately subjective. You should consider your income, the type of debt you have, your savings, and your broader financial goals.

“You may be more motivated to invest your disposable income than to pay off your mortgage or student loan debt,” says Leslie Tayne, debt relief lawyer at Tayne Law Group. “But someone else may prioritize paying off a car or other high interest debt like credit cards to be debt free over everything else.”

Make paying off your debt more manageable

If you’re struggling with debt, you can take steps to make it more manageable, including refinancing your student loans, taking out a debt consolidation loan, or using a credit card. with balance transfer.

A credit card with balance transfer can help you pay off your credit card balance faster by giving you an interest-free introductory period. The US Bank Visa® Platinum card offers 0% APR for the first 20 billing cycles on balance transfers (and purchases), so you have over a year to pay off your credit card debt without accumulating more interest (after, 14.49% to 24.49% variable AVR). The introductory APR of 0% applies to balance transfers made within 60 days of opening the account.

For a balance transfer card that also offers rewards, the Citi® Double Cash card comes with 0% APR for the first 18 months on balance transfers (after that, 13.99% to 23.99% APR variable). Balance transfers must be made within four months of opening an account. Cardholders can also receive 2% cash back: 1% on all qualifying purchases and an additional 1% after paying their credit card bill.

At the end of the line

There are general guidelines you can follow to help you know if you’re on the right track to paying off your debt. In addition to meeting minimum payments, you can consider the 36% threshold or work outside of the 50/30/20 rule.

Ultimately, however, how much you spend to pay off your debt really comes down to tailoring it to your personal financial situation and goals.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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