What level of debt is acceptable for your family?

As lockdown looms again, this is a time when many households are taking on more debt. Some cannot work during lockdown, others are simply working less and unable to earn enough.

But before heading for the bank, it’s prudent to estimate a level of debt that you can live with. You don’t want to find yourself struggling to make payments, because that’s how you wind up borrowing more.

The experts tell us that there is a good rule-of-thumb to determine how much debt you should take on. The paradigm is referred to as the 28/36  rule.  According to this rule, households should spend no more than 28 per cent of their gross income on the regular bills that must be paid.

This includes mortgage payments or rent, insurance, taxes, car payments, telephone and internet, and, of course, any similar expenses (like refuse payments, etc.)

If you have other debts, like credit cards, previously incurred debts, expenses like a country club or a boat, you should never have more than a maximum of 36 per cent on total debt service.

It’s very important to keep this rule in mind when taking on a mortgage, buying a car, or making any other purchase or commitment that will last over a period of years.

As anyone who’s been there will tell you, getting mired in debt is miserable; it affects every aspect of your life. The most basic pain it causes is that rotten feeling that you don’t dare to spend a single euro. You also find yourself constantly seeking ways to find more money, instead of taking care of your children, your spouse, and other family and friends.

The misery can grow to a point where it affects your health. The stress from debt can lead to mild to severe health problems including ulcers, migraines, depression, and even heart attacks.

So  paying attention to levels of debt matters. Even if you don’t agree with the 28/36 rule, set your own threshold for debt. And keep to it.