When looking at how much debt you should go into for a big investment, the number varies by each person and their unique circumstances. However, it is important for everyone to calculate their monthly and annual gross income to figure out a monthly payment you can be comfortable with. Payments also vary depending on the type of debt - whether it's student debt, business debt, home debt, or automobile debt.
Last year alone, 71% of students graduated with around $35,051 in student debt.
It is hard to know how much debt is ok to go into for school, because often, student's don't know what career they will have upon graduation. Before deciding how much debt to invest in, calculate the following:
Add a buffer since the numbers and interest rates could increase every year.
If the graduation debt is less than someones annual first-year starting salary, it is most likely a doable amount to pay in 10 years (at the most). As a rule of thumb, 10 years or less is a good goal to shoot for in paying off the debt entirely. It is when the debt amount far surpasses your annual income that people start to struggle on monthly payments. If you can pay 10% of their income over the course of 10 years, and pay off the entire loan, it is usually the right amount.
But it can be hard to estimate how much you will make without even having the job yet. Research how the job market is, and how it is looking for the desired career field. Every person is comfortable with a different amount of debt, based on their unique circumstances. These questions are important to think about before taking out the debt.
If you already have student debt and you're interested in consolidating or refinancing, check out our favorite student loan companies.
How much money a business should borrow depends on how the business is doing with their sales, or how they are projected to do with their sales if they are just starting. Will the debt have a good return on investment? The debt-to-equity ratio is extremely important to look at. This ratio will show if the generated sales and income coming in are enough to handle the debt load. The amount of debt a business is in should still allow the owners to comfortably make month payments. When apply for a loan, banks usually want the owners to make at least 20-40% of the request. Can the owner do this without financially struggling? It is best to really consider if going into a lot of debt for the business is necessary; A study by Census Bureau's data states that 60% of all small businesses opened in a given year need less than $5,000 to start.
A home or living space is a necessity. A house is a big financial commitment, and it is recommended that you be debt free and have 3 - 6 months of expenses saved (as well as the down payment) before getting a house. However, many people do not do this. To be extra cautious, make sure the house's monthly payment is 28% or less of your gross monthly income. This number includes mortgage payments, insurance, property taxes and association fees. Often, the housing payment is the largest of monthly debt payment you will make. As a rule of thumb, it is smart to make sure that your monthly debt payments (like student loans, credit card debt, and automobile loans) should be around 36% of your total monthly income. This smart debt rule is called the 28/36 rule, and though the end number is different for each person, is a great guideline to go by.
For those looking into getting a car, a general rule is to spend around 20% of your monthly gross income on the car's monthly payments. On the higher end, and at the very most, no more than 36% of your monthly gross income should go toward the car's payments. Going into any more debt for the car can turn into a big financial struggle.
Additionally, getting a car is not just the automobile itself - but also the gas, car insurance, oil, and maintenance. For this reason, you should always look at your budget before settling on a car loan.