How much debt is too much?

One of the most important aspects of debt management is one's ability to repay it. If one has considerable assets and savings in addition to an income more debt can be comfortably taken on than someone who has an income and no savings. Thus one should not only consider the ratio between debt and income but other financial indicators. What's more, when a business or individual is experiencing fast financial growth it can be beneficial to take on more debt as this assists in the growth process and is based on anticipated earnings in the future.

When considering how much debt is too much consider things like mortgage, car loans, credit cards, medical bills, student loans, margin accounts and/or any other loans. Consulting money management resources such as the Federal Trade Commission for additional guidance is also helpful. Add to these other expenses such as daily living expenses such as insurance, utilities, food and entertainment. They all add up and one should know exactly how much money is available every month to pay these financial obligations. When the bills outweigh the resources, financial despair may soon be at hand. A few factors to consider when taking on debt are as follows:

• Confidence of debt in relation to future income and financial performance
• Comfort level of debt as considered in relation to assets, expenses and income
• Capacity to pay back debt in a hurry and finance an emergency should such a situation emerge

Assuming one is aiming for some debt to improve life goals or business performance, several key factors should be considered when taking on any kind of debt and are included as follows:

• Income level and stability
• Debt interest rates
• Asset taxation
• Opportunity cost of debt
• Benefits of debt

The more steady and higher one's income the better equipped one is to handle debt to a certain level. If the debt's interest rates are too high the amount owed may compound monthly causing the total annualized debt to rise. What's more, if one's assets, especially those purchased using debt have high levels of taxation, the amount to disposable income one has around tax time may go down. In this case think twice before financing a larger home, luxury automobile or boat.

Also of relevance is opportunity cost; if a financial obligation requires one to invest time and energy such as in the case of student loan debt, professional training or certification is the lost time working worth the debt taken on? Naturally, this leads us to the benefits of debt. With debt one may improve one's life, but the potential is also there to make one's life more stressful as payments may just be too high.

Debt is often encouraged by banks and businesses because it means more money for them, with the partial exception of business loans. All one has to do is pass a credit check and it is a green light to hand over a piece of one's financial life to another person or organization. Proper debt management can facilitate professional growth, increased income and a higher standard of living,  however it is also wise to balance loans and interest accrued on those loans against things like income, interest rates and taxation.

Deciding how much debt is too much is a personal choice. Debt is somewhat of a subjective term because some people feel more comfortable with it than others. So it is important to know how much debt one is willing to risk. Having said that there are several concepts to consider once one has agreed to take on debt of any kind.

While comfort with debt is an important factor there are also several other variables a debtor should consider as well. When deciding the ideal debt to income ratio for oneself, it may be helpful to consider the information presented in this article. Debt can pay off better than one anticipated, but it can also be a pitfall if used unwisely or incorrectly.