With all the media attention paid to the budget mismanagement and overwhelming debt of the federal government, Americans may be missing the most important lesson from our national debt crisis - the importance of putting budget guidelines and a debt ceiling in place to keep personal debt under control. If you’re hoping to maintain your standard of living, you can’t continue to borrow like Uncle Sam and avoid paying down your outstanding debts. Here are some tips and guidelines for establishing the appropriate personal debt ceiling:
Do Your Homework
We begin to learn the basics of money management as kids – spend all your money in one place and have nothing for a rainy day. But to effectively handle the finances of a home and family, it gets a lot more complicated. Juggling your wants, needs, income, mortgage, insurance, vacation, college and all the other important financial concerns of a good life requires commitment and a plan.
Read all you can about the impact your credit history has on your future and take seriously the steps needed to improve your credit score. A history of poor credit management will make it hard to buy a home or automobile, rent an apartment, and even prevent you from getting a new job.
Establishing a Ceiling
Compare your income against your expenses to see the truth about your financial situation. A debt ceiling is the maximum amount of debt you will allow yourself to incur. It’s an arbitrary number that will help guide you in keeping debt under control. But financial experts suggest that debt repayment should not exceed 40% of gross annual income. For example, with an annual income of $40,000 a debt ceiling of $16,000 would be reasonable.
Make a budget that you can stick to, but not so strict that you feel deprived. The point is to spend less than you earn and to have something left for a rainy day, while still making a dent in your debt. You may find that your debt already exceeds your debt ceiling limit. If that’s the case, you’ll need to work hard to get below that level.
There are tons of online resources and thousands of easy to understand debt relief articles to help you learn how to better manage your money. Just one or two small changes can mean more money for a rainy day or the ability to make a bigger dent in your debt. And remember, your debt ceiling may change as your income increases or decreases, but it’s an effective tool for the rest of your life.
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