How Much Debt is Too Much Debt?

When debt moves from being a manageable tool for building a better life to a crippling burden that threatens your long term financial stability, it’s time to take action. 

But how much debt is too much? When do you need to start worrying?

The amount of debt considered “too much” can vary depending on individual circumstances, financial goals, and income levels. 

Recognising these indicators is crucial to addressing the issue early. 

Keep reading to discover the indicators that can determine whether you have too much debt and explore practical steps you can take to regain control of your finances.

Understanding Debt

We often rely on credit to manage our financial needs; from personal loans and credit cards to home loans and vehicle financing. 

A significant portion of South Africans are grappling with debt, with many individuals spending a large percentage of their income on debt repayments. This trend highlights the importance of understanding and managing debt effectively.

Indicators that you have too much debt 

1. You Have a High Debt-to-Income Ratio:

• The debt-to-income ratio measures how much of your income goes to debt payments. If it exceeds 43%, you may be over-indebted.
• To calculate your debt-to-income ratio, divide your total monthly debt payments by your gross monthly income, then multiply by 100 to get a percentage.
• Alternatively, use our debt calculator tool to determine whether you are over indebted.

2. You Can Only Afford the Minimum Payments:

• If you find it challenging to make minimum payments on your credit cards or loans and struggle to set aside income for living expenses, it may be a sign that your debt is unmanageable.
• Missing payments or paying only the minimum amount can lead to increased interest charges and further financial strain.

3. You Use Debt to Pay Debt:

• Relying on new loans or credit cards to pay off existing debt is a clear indicator of financial trouble. This cycle can quickly spiral out of control, leading to higher interest rates and fees.

4. Lack of Savings:

• An inability to save money due to high debt repayments is another red flag. Ideally, you should have an emergency fund that covers at least three to six months of living expenses. 
• If your debt payments prevent you from saving, it may be time to reassess your financial situation.

What are the consequences of too much debt? 

When you have too much debt and can’t cover living expenses, you may miss payments, damage your credit, face legal actions, and experience significant stress. You might struggle to afford basic needs and risk accumulating more debt or even repossession of assets or a salary garnishing order. 

How do you manage your debt effectively?

1. Create a Budget

Your budget will reveal if you have too much debt by comparing your income to your living expenses and debt repayments

2. Your budget shows you have too much debt if:

• Income vs. Living Expenses: If your income barely covers or falls short of your essential living expenses (housing, food, utilities), it indicates financial strain.
• Debt Repayments: If a significant portion of your income goes toward debt repayments, leaving little for necessities or savings, it’s a sign your debt is too high.
• Negative Cash Flow: If your budget shows a negative cash flow, meaning your expenses (including debt payments) exceed your income, you have too much debt.

3. Reduce Unnecessary Spending

Identify and cut down on non-essential expenses. This might include dining out less frequently, cancelling unused subscriptions, or finding more affordable alternatives for services and products.

4. Increase Your Income

Look for opportunities to increase your income, such as taking on a part-time job, freelancing, or selling unused items. Additional income can help you pay down debt faster.

How Debt Review can assist your financial situation:

Debt Review is a highly regulated process designed to help over indebted South Africans free up cash flow for living expenses. 

The process provides immediate financial relief by legally renegotiating monthly debt payments and interest rates on unsecured debt while protecting assets. 

This process allows individuals to become debt-free in an affordable manner.

By recognising the signs of excessive debt and implementing effective debt management strategies, you can regain control of your finances and work towards a debt-free future.

For more information and resources on managing your debt, visit Debt Rescue.

Are you struggling with debt while earning an income? If so, let our expert debt counsellors provide a no-obligation, cost-free assessment to consolidate and reduce your monthly repayments for immediate financial relief.

Contact us to speak with our expert counsellors and start your journey toward financial freedom.