How much Debt is too much? Managing your debt: basic guidelines
For most of us, we want to have a new car, a new home, luxury vacations, a great wardrobe, a big screen TV or expensive jewelry. There is nothing wrong with having these things, but you should be able to afford them. But what if you want them now and you think you can “afford” the payments? This is a very important question. Are you heading towards too much debt? Even if you can manage your payments, at least for now, you may be heading for trouble. Here are 3 ways from tax consultants in Toronto to determine if you have maxed out in terms of your debts.
- What the Banks Say is too much?
Here is how the bank looks at your debt: If you were to add up all of your monthly debt payments along with heating and taxes for your house, the percentage should not exceed 40% of your total income. So when you add up your monthly credit card payments, car payment, mortgage payment and payments for heat and taxes, the total of all of these payments should not exceed 40% of your monthly income. These before you pay your taxes. This is called by lenders as the Total Debt Servicing Ratio (TDSR). If this percentage is 40% or greater, they would not lend you any more money in general. However, there are some very small exceptions to this rule that are really not worth mentioning here. However, your lending bank will consider using them if they apply to your situation.
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What Your Budget Says is too much?
Another way to determine your debt status is when you put together your personal budget. You could figure out the minimum amount of money that you need to live a lifestyle that is acceptable to you. When you are able to do this, you can see what the maximum amount of debt is that you can afford to make payments on. This is one of the smartest ways to know your debt situation and also for your overall finances. Thus once this is known you could confidently say no to banks or credit card Company which offers you debt. These companies would lure you take higher debts in order to meet their targets, but once you know you would not take any wrong financial decisions for the future.
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The Simplest Way to See if You Have Too Much Debt
In case you want to know a simple yet effective way to know what is your debt situation is determining how much of your income goes into paying off your existing debts. If this is more than half of what you earn, you must know that you have reached the maximum level and need to do something quickly to get out of this situation.
In conclusion, we hope that your debts are within your control and that you are managing the same well. At “The Accounting and Tax” we provide the best financial consultation in Canada and USA. To know more about our services please visit our website.
