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Question:


What is a healthy/optimal amount of debt that one should take as a percentage of his annual income?
-goalgami user001


Answer:


You know what they say – it’s not the fall that kills you, it’s the sudden stop. Likewise, it’s not going into debt that causes problems, it’s an inability to pay the money back. There is no way to state an appropriate percentage of income that debt should or could comprise because of great variation among the factors that determine how easily a debt can be repaid: interest rates, loan maturities, job security and, of course, the amount borrowed.
 
It might be more productive to work backwards. Planners often recommend keeping your expenses to no more than 90 percent of your income. That extra 10 percent is there to cover the unforeseen needs and wants that often pop up. To determine a safe amount of debt, subtract 10 percent from your income, then deduct your other expenses. You can borrow up to an amount for which payments will be less than whatever you have left.
 
An example: You take home $4,000 a month and you spend $3,100. Add in the recommended 10 percent cushion, or $400, and you’ve got $500 for debt payments. A similar calculation can be used to decide whether to buy a home. If your monthly expenses, less housing, total $2,200 on the same income, then you can probably afford payments on the mortgage (plus any other outstanding debt) of $1,400.
-Conrad de Aenlle



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