What Is a Reasonable Amount of Debt? This Rule Can Help You Know (2024)

The amount of debt you can consider "reasonable" will vary widely depending on a number of factors about your financial situation and the type of debt you have. You'll need to consider how you are using the debt and how you are able to pay it off, as well as the debt's impact on your overall credit.

Learn how to determine how much debt is too much and how much debt may be considered reasonable. Then, you can better analyze your own financial situation.

Key Takeaways

  • Some debt may not be considered good if it helps improve your financial situation.
  • Good debt may include a mortgage that can help you buy a home and build and asset.
  • If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable.
  • The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.

The Good Side of Debt

Debt can allow you to purchase useful assets that would otherwise be too costly. Taking on a mortgage to buy a home, for example, not only provides a family with a place to live but can, in the long term, prove to be a worthwhile investment.

This is not to say that you should constantly be taking on debt. A moderate amount of debt that helps your overall situation and is within your means to pay down may be considered a reasonable amount of debt.

Generally, what is considered a reasonable amount of debt depends on a variety of factors, such as what stage of life you are in, your spending and saving habits, the stability of your job, your career prospects, your financial obligations, and so on.

The interest rates that you're paying on your debt are another important factor in determining whether a debt is reasonable. A relatively low interest rate, such as those found on mortgages, makes debt manageable. On the other hand, high-interest rates, such as those on payday loans and some credit cards, can lead to debt levels spiraling out of control.

If you have an unmanageable amount of debt, you may want to consider using a debt relief company, which can help you negotiate with creditors to pay a lower amount. These companies work with unsecured debt in which you are significantly behind in payments.

Using the 28/36 Rule

A common rule-of-thumb to calculate a reasonable debt load is the 28/36 rule. According to this rule, households should spend no more than 28% of their gross income on home-related expenses, including mortgage payments, homeowners insurance, and property taxes. At the same time, they should spend no more than 36% on housing expenses plus all other debts, such as car loans and credit cards.

So, if you earn $50,000 per year and follow the 28/36 rule, your housing expenses should not exceed $14,000 annually, or about $1,167 per month, and your housing expenses plus other debt service should not exceed $18,000. That means your non-housing debts should cost you no more than $4,000 annually or $333 per month.

Further assuming that you can get a 30-year fixed-rate mortgage at an interest rate of 4% and that your monthly mortgage payments are a maximum of $900 (leaving $267, or $1,167 less $900, monthly toward insurance, property taxes, and other housing expenses), the maximum mortgage debt you can take on is about $188,500.

If you are in the fortunate position of having no credit card debt and no other liabilities and are also thinking about buying a new car to get around town, you can take on a car loan of about $17,500 (assuming an interest rate of 5% on the car loan, repayable over five years).

To summarize, at an income level of $50,000 annually, or $4,167 per month, a reasonable amount of debt would be anything below the maximum threshold of $188,500 in mortgage debt and an additional $17,500 in other personal debt (a car loan, in this instance).

Note that this example is based on early 2020s interest rates, which were at near-historic lows. Higher interest rates on mortgage debt and personal loans would reduce the amount of debt that can be serviced since interest costs would eat up a larger chunk of your available income.

Applying the 28/36 Rule to Take-Home Pay

The 28/36 rule is typically applied to gross income, as in the scenario above. Financial institutions also use gross income in calculating acceptable debt ratios, because net income or take-home pay can vary from one locale to the next, depending on state and local income taxes and other paycheck deductions.

But it can be safer to base your borrowing and spending habits on your take-home pay, since this is the amount that you actually have at your disposal after taxes and other deductions.

So, in the above example, assuming that income tax and other deductions reduce gross income by a total of 25%, you're left with $37,500 or $3,125 monthly. This means that if you follow the 28/36 rule, you could allocate $10,500 or $875 monthly to household-related costs and $250 to other debt, for a total of $1,125 per month or $13,500 annually.

What Is Debt Service?

Debt service refers to the amount of money a person or business must pay each month (or other time period) to cover their debts. If too much of a person's or a company's income is going toward debt service, lenders may not be willing to extend them additional credit.

What Is a Debt-to-Income Ratio?

Debt-to-income (DTI) ratio is a common measure used in consumer lending. It divides an individual's total monthly debt payments by their gross monthly income to arrive at a percentage. What constitutes an acceptable (or excessive) DTI can vary from lender to lender and by loan type.

What Is Debt Consolidation?

Debt consolidation is a process of taking on a new loan or other type of debt to pay off multiple existing debts. The goal of debt consolidation is usually to attain a lower interest rate, resulting in lower monthly debt payments.

The Bottom Line

Debt can be a financial benefit when it's managed properly and when it serves to help you build wealth. While your personal financial situation will ultimately dictate the amount of debt that's reasonable, the 28/36 rule provides a useful starting point to calculate a reasonable debt load. Consider consulting a financial professional to help you determine how debt can play a role in your finances.

What Is a Reasonable Amount of Debt? This Rule Can Help You Know (2024)


What Is a Reasonable Amount of Debt? This Rule Can Help You Know? ›

Key takeaways

What is a reasonable amount of debt? ›

Ideally, financial experts like to see a DTI of no more than 15 to 20 percent of your net income. For example, a family with a $250 car payment and $100 of monthly credit card payments, and $2,500 net income per month would have a DTI of 14 percent ($350/$2,500 = 0.14 or 14%).

What is the debt rule? ›

The 28/36 rule refers to a common-sense approach used to calculate the amount of debt an individual or household should assume. A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service.

What is a reasonable debt ratio? ›

Do I need to worry about my debt ratio? If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.

What is an example of the 20 10 rule? ›

For this example, consider Tom, a hypothetical borrower who has a take-home pay of $50,000 per year. In this example, 20% of Tom's $50,000 income is $10,000. According to the 20/10 rule, Tom's total debt should fall below $10,000.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.

Is $2,000 dollar debt bad? ›

Is $2,000 too much credit card debt? $2,000 in credit card debt is manageable if you can pay more than the minimum each month. If it's hard to keep up with the payments, then you'll need to make some financial changes, such as tightening up your spending or refinancing your debt.

What is the safe debt rule? ›

If you cannot afford to pay your minimum debt payments, your debt amount is unreasonable. The 28/36 rule states that no more than 28% of a household's gross income should be spent on housing and no more than 36% on housing plus other debt.

What is one rule to limit debt? ›

The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).

What is the golden rule of debt? ›

This golden rule consists of following a balanced budget and allows governments to resort to public debt only to finance public investment expenditures. This rule helps stimulate economic growth through an increase in public capital while avoiding a drift in public finance.

Is 0.5 a good debt ratio? ›

If the ratio is over 1, a company has more debt than assets. If the ratio is below 1, the company has more assets than debt. Broadly speaking, ratios of 60% (0.6) or more are considered high, while ratios of 40% (0.4) or less are considered low.

What is a reasonable debt-to-income ratio would be less than? ›

Lenders, including anyone who might give you a mortgage or an auto loan, use DTI as a measure of creditworthiness. DTI is one factor that can help lenders decide whether you can repay the money you have borrowed or take on more debt. A good debt-to-income ratio is below 43%, and many lenders prefer 36% or below.

What is an example of a debt ratio? ›

Let's say you have 600,000$ in total assets and 150,000$ in liabilities. To calculate the debt ratio, divide the liability (150,000$ ) by the total assets (600,000$ ). This results in a debt ratio of 0.25 or 25 percent.

What is the 20 10 rule for debt? ›

However, one of the most important benefits of this rule is that you can keep more of your income and save. The 20/10 rule follows the logic that no more than 20% of your annual net income should be spent on consumer debt and no more than 10% of your monthly net income should be used to pay debt repayments.

What is Rule 69 in finance? ›

What is the Rule of 69? The Rule of 69 is used to estimate the amount of time it will take for an investment to double, assuming continuously compounded interest. The calculation is to divide 69 by the rate of return for an investment and then add 0.35 to the result.

What is the 10/20/30 rule money? ›

30% should go towards discretionary spending (such as dining out, entertainment, and shopping) - Hubble Money App is just for this. 20% should go towards savings or paying off debt. 10% should go towards charitable giving or other financial goals.

Is $5000 in debt a lot? ›

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month.

How much debt does an average person have? ›

The average American owed $103,358 in consumer debt in the second quarter of 2023, the latest data available, according to credit bureau Experian.

Is 10k a lot of debt? ›

There's no specific definition of “a lot of debt” — $10,000 might be a high amount of debt to one person, for example, but a very manageable debt for someone else. Calculating your debt-to-income (DTI) ratio gives you a rough idea.

Is 30K in debt a lot? ›

The average amount is almost $30K. Some have more, while others have less, but it's a sobering number. There are actions you can take if you're a Millennial and you're carrying this much debt.

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