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How much debt is too much debt?

If you’re like most people, you have debt. For many people, some debt is fine — like when it’s connected to a financial goal such as owning a home or earning a degree. But how much debt is too much?

At Fivent, we measure the burden of debt on a person’s finances using three ratios:

  • Monthly debt payments-to-monthly income
  • Total Debt-to-Annual Gross income
  • Total Debt-to-Total Assets

Using these three metrics we intend to measure how the level of debt of a person affects their monthly budget; how large the debt owed is in relation to the annual income of the person, income that may come from different sources and at irregularly periods; and how large the debt burden is in relation to the person’s tangible assets such as real estate property and vehicles. 

The chart below shows a scale to evaluate whether you have too much debt.

Level of indebtedness Monthly debt payments-to-monthly net income Total Debt-to-Annual Gross income Total Debt-to-Total Assets
High >0.5 >3.0 >0.75
Medium high 0.5>x>0.4 3.0>x>2.25 0.75>x>0.5
Medium 0.4>x>0.3 2.25>x>1.5 0.5>x>0.25
Medium low 0.3>x>0.2 1.5>x>0.25 0.25>x>0.1
Low <0.2 <0.25 <0.1

Let’s see the following example. John has an annual gross income of $65,000, and a monthly net income of $3,500. He owns an apartment with a market value of $180,000 and a car valued at $15,000. John has an outstanding student loan of $20,000 and a mortgage of $75,000. The monthly payments of these debts are $400 and $900 respectively. Additionally, John has a balance of $550 on his credit cards with a minimum monthly payment of $25. 

Monthly net income: $3,500

Annual gross income: $65,000

Tangible assets: $195,000

Total debt: $95,550

Monthly payments: $1,325

Monthly debt payments-to-monthly net income: 1,325/3,500 = 0.38 (Medium)

Total Debt-to-Annual Gross income: 95,550/65,000 = 1.47 (Medium low)

Total Debt-to-Total Assets: 95,550/195,000 = 0.49 (Medium)

In this example, John has a manageable level of indebtedness. However, it would be advisable that John take measures to ensure his current level of monthly net income, and if possible increase it, so that he can continue making his payments consistently and possibly accelerate those payments to lower his total debt faster.

Are you still not sure if you have too much debt? If your debt is causing you stress or sleepless nights, then it’s likely time to assess what you owe and pay off your debt.

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