How To Determine Your Debt Tolerance

Debt can be tricky. While on one hand it can help you achieve your goals and build your wealth, it can also be a downfall if you do not know how to use it properly. Sometimes, it seems like taking on debt is a good idea for raising net worth and building credit. However, building up debt can be a slippery slope and quickly turn negative, if you are over-spending and taking on too much. 

We know that finding the right balance can be tricky, so determining your debt tolerance might be an easy way to start tracking it. Today we want to point out a few key factors to consider if you are trying to figure out if you can afford more debt.

Calculate your debt-to-income ratio

Whats a DTI? Lenders use a standardized calculation called debt-to-income ratio (DTI) to decide whether you can take on a loan. DTI is calculated by dividing your monthly expenses by your gross monthly income before taxes. 

Watch out for your credit utilization 

If you are making a big purchase, take a second and think about your credit utilization rate. Buying a big expensive item may seem like a good idea, but it may temporarily drop your credit score and raise your CUR.  However, once you pay the balance off, your score will improve. A typical rule of thumb is to not spend too much over 30% of your CUR. 

Add up at the total cost of the debt

The more money you borrow, the more you’ll have to pay back in interest and other fees. Always do your research on the types of loans you will be applying to before taking it on. Think about using tools such as interest calculators to see how much you are really paying when you take on a loan.  

Putting aside the financials, you also want think about your personal financial situation. Make sure you are comfortable with your debt tolerance and know what you are doing before taking out more and more debt. If you have any questions about your personal situation or about debt, please email us at info@shermanwealth.com or schedule a 30-minute consultation here.