Personal Finances

How Much Debt Can You Handle?

If you feel that you have too much debt, you are not alone.

Debt is very common

Many people have substantial debt, more than they can handle. However, debt is not all bad. Sometimes it makes sense to use borrowed money for certain investments. However, many folks are not using debt in that way; they are using it to make ordinary purchases of things they may not even need. Sometimes, spending has become a status symbol. This can encourage people to spend more than they should—more than they have. Consequently, they may run up debt.

While some debt is okay, too much debt may not be. So, how might you know whether you have too much debt or not? First, let’s look at the different kinds of debt we might incur.

Debt is not always a bad thing.
There is investment debt and there is consumer debt.

Two kinds of debt

First, there is investment debt, such as the debt incurred to buy a home (mortgage) or to start a business. Generally this kind of debt is used to purchase assets that, when liquidated, will help provide cash to repay the debt, or will help provide income or have use value over the life of the loan that offsets the debt repayments. For example, if you borrow money to buy a house, you will have the use of the house that offsets any rent payments you might have had to pay for other shelter.

Consumer debt is the borrowing of money to buy things that decrease in value with use or over time. If you borrow money to buy a car, clothing, holiday gifts, etc., you are using consumer debt. Consumer goods generally become worthless over time or with use. They are consumed. But the debt remains.