Assessing Your Debt Levels and Improving Your Financial Well-being

Debt can be both a burden and a tool, depending on how it is managed. If you ask a well versed Certified Financial Planner, most likely will highlight the importance of understanding and managing debt to improve one’s personal financial well-being. By asking the right questions and assessing your debt levels, you can create a plan that turns debt into a beneficial component of your financial strategy.

1. What Type of Debt Do You Have?

Understanding the type of debt you have is the first step in assessing its impact on your financial health. Different types of debt have varying effects:

• Mortgage Debt: Typically considered mild due to lower interest rates and the potential for property value appreciation. Mortgages can help achieve long-term financial goals and are often seen as an investment.
• Credit Card Debt: Usually carries high-interest rates and can quickly become unmanageable if not paid off regularly.
• Car Debt: Falls between mortgage and credit card debt. It can be avoided by purchasing within your means, but some may find it necessary.
• Medical Debt: Often unavoidable and can be significant, but it is essential to manage it to avoid financial strain.

2. How Much Debt Do You Have?

The amount of debt is as crucial as its type. To evaluate whether your debt is manageable, calculate your debt-to-income ratio. This ratio is determined by dividing your total monthly debt payments by your gross monthly income. The Consumer Financial Protection Bureau suggests that a debt-to-income ratio above 43% indicates potential difficulty in managing monthly payments.

However, this ratio does not account for other monthly budget obligations like rent, utilities, groceries, and childcare. It’s essential to assess your budget comprehensively to ensure that your debt payments are within your financial capacity.

3. Is Your Debt Keeping You from Paying Bills and Reaching Your Goals?

A significant indicator of unmanageable debt is its impact on your ability to pay regular bills and achieve financial goals. If adhering to your budget, including loan and credit payments, hinders your progress towards goals such as building an emergency fund, saving for education, or retirement, it is a sign that your debt may be problematic.