How to Get Out of Debt
Most Americans have debt. Some debt is good, because you need to establish a line of credit before you can get a loan for a new home or a college tuition. Spending more than you can afford, however, gets you into trouble. Learn how to get out of debt sooner rather than later.
How common is debt?
The average credit card debt for an American household is $10,637. With an average home mortgage of $240,000 and an average auto loan of $30,738, Americans will see tens of thousands of dollars over their lifetime paid against that debt. America has a culture of debt, and it’s going to get worse before it gets better. In fact, Deloitte research shows that 11 percent of consumers defaulted on a loan for the first time last year.
How much debt is too much?
Many experts agree that your personal debt-to-income ratio should be less than 35-40 percent of your gross income. Roughly 25 percent of your income goes to taxes, and if you’re saving a healthy 15 percent for retirement and your family’s future, that leaves around 25-30 percent for everything else. Check out SmartMoney’s “Do You Have too Much Debt?” calculator to learn more.
How to get out of debt
Adjust your lifestyle, and learn to live in moderation. Cut back on unnecessary expenses, and concentrate on paying back what you already owe.
- Don’t purchase a home that’s too expensive. Learn how much house you can afford based on your income.
- Manage your spending. Get in the habit of automatically saving money, and resist the urge to impulse buy.
- Don’t tap your 401(k) early. It comes with several fees, and there are other ways to get money if you’re truly in a tight spot.
- Focus on reasonable home renovations. If you have to make home improvements or want to renovate, establish a budget and stick to it.
- Only take on student loans you need.
Though many Americans are in the red, if you manage your spending and only purchase things you can afford, you will be well on your way to getting out of debt.