Here’s How Much of Your Monthly Income Should Go Toward Your Debt Repayments

How much should you allocate to debt repayments each month? There’s no universal answer that fits everyone’s situation. There’s no universal answer that fits everyone’s situation. Financial professionals and personal finance “experts” can offer suggested strategies, but that doesn’t mean they are right for you. Before implementing any of these strategies, it’s necessary to do a personal finance evaluation.  

Begin by adding up all your debt. Itemize each debt account with its outstanding balance and interest rate. If you’re going to pay off the smallest balance first, have a debt snowball calculator ready to see how increasing and decreasing monthly payments will affect you. You can also exercise the debt avalanche method, which prioritizes the highest interest rate.

Monthly Income And Debt Repayments

Debt Repayments - How Much To Allocate From Your Monthly Income 1

Calculate debt repayments with your debt-to-income ratio

Your debt-to-income (DTI) ratio is equal to your total monthly debt repayments divided by your total gross income. Debt should include mortgages, personal loans, credit cards, and auto loans. Lenders like to see DTIs that are 36% or lower.

According to Federal Reserve, the national average for DTI is 8.69%, but that number is somewhat skewed if you have a mortgage. 

If you’re a mortgage holder and your DTI is under 20%, you’re doing OK. That’s your target number. Using this philosophy, with a gross household income of $10,000 a month, all your debt repayments should add up to less than $2,000.

The other $8,000 can be earmarked for household expenses, savings, retirement, and the occasional spending splurge.

Also Read: How To Deal With Debt – 5 Things You Should Know About

Breaking down the 50/30/20 approach to budgeting

Another budgeting strategy recommended by economists is the 50/30/20 rule. It allocates 50% of your income for essential expenses. This model includes rent and mortgage payments in this category, so your debt in this scenario consists of other loans and credit cards. The 20% is your debt/savings number. The 30% number is for “wants” or non-essential expenses.

The U.S. Department of Housing and Urban Development (HUD) has reported that the 2021 median household income in the United States is $79,900.

That’s a little over $6,600 a month, so your 50/30/20 numbers would be $3,300 for essentials (including your mortgage), $1,980 for non-essentials, and $1,320 toward debt and savings. Do those numbers work for you?

Also Read: Top 5 Ways To Deal With Debt Collection Companies

Research debt consolidation alternatives

Lower household incomes can make these numbers challenging to work with. If you’re in a position where your monthly debt repayments are over 20%, you may need to seek a debt consolidation alternative.

This would eliminate high-interest credit card debt and turn it into loan debt with more manageable monthly payments.

Most traditional banks and online lenders offer debt consolidation loans with reasonable interest rates. If you decide on this option, the key to making it worthwhile is to refrain from accumulating any new debt.

So, stop using your credit cards until you pay off the debt consolidation loan balance. You’ll also want to avoid applying for any new credit.

Also Read: How To Do Personal Loan EMI Calculation?

Make a plan and set the debt repayments goal

You can set a target for monthly debt repayments by using a percentage of your DTI or with the 50/30/20 rule. Either way, put a plan in place and set a debt payoff goal.

So, apply for a debt consolidation loan if the numbers don’t work for you. Stick to your strategy, and you’ll be debt-free by your target date.

Must Read: How To Regain Control Of Your Finances In 2021

Image by Goumbik and mohamed Hassan

Author Bio: Kevin Flynn is a former fintech coach and financial services professional. While not on the golf course, he can be seen traveling with his wife or spending time among their nine wonderful grandchildren and two cats. 

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