7 Key Signs You’re Adding Too Much Debt Each Month
Written by
Adam Palasciano
Edited by
Cory Dudak
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Many of us strive to be or become wealthy someday. Keeping your spending in check and saving wisely are both key to achieving this goal, but this can be difficult for many reasons. Rising costs, taking care of dependents, student loan payments resuming and more can make it challenging to stay out of debt. USA Today reported that the average American’s credit card debt is $7,951 and the average American consumer’s debt is roughly $95,067.
However, finding a healthy balance between saving, investing and spending can help. These warning signs indicate that you might be adding too much to your debt each month.
1. You Don’t Save Money
This might be the most obvious sign that you’re adding too much to your debt. If you aren’t saving any money each month, it’s likely that you’re also overspending and incurring debt. Simple lifestyle changes, such as eliminating your morning coffee out, bringing your own lunch to work or setting up automatic weekly deposits from your checking account to your savings account are all a great start to saving money.
2. You’re Living Above Your Means
Living above your means is when you’re spending more money than you make each month. If your expenses exceed your net take-home pay each month, you may find yourself in debt. Cutting back somewhere, perhaps on an extra expense that you can forgo like a streaming subscription or a few extra dinners out, can help reduce expenses and avoid more debt. The key to achieving financial stability is having more money coming in than going out.
3. You’re Shouldering Credit Card Debt
Using credit cards to pay for everyday expenses is totally fine, as long as you’re paying your balance in full on your due date each month. If you only pay the required minimum payment, the remaining balance will accrue interest and grow to a much larger balance. Unfortunately, credit cards tend to have very high interest rates, and your debt can quickly spiral out of control. If you’re already in credit card debt, consider consolidating your debt to a new card with a 0% APR balance transfer offer or a low-interest personal loan.
4. You Buy Things To Impress Your Friends and Family
The classic term “keeping up with the Joneses” comes to mind. If you’re making purchases such as a new car, a lavish vacation or the newest smartphone just to show off, this can cost your wallet dearly (especially if you’re taking on credit card debt to pay for these expenses). Comparing yourself to and spending like others can be a dangerous financial trap.
5. Your Budget Is Based On Your Gross Income
Many of us have a fixed annual salary or hourly wage. This allows for predictable cash flow each month as well as a means of budgeting accordingly. But if you’re basing your budget and expenses on the gross figure each month, you’re spending more than you earn. Your net take-home pay after applicable federal and state taxes is the figure to base your budget on. To add, if you’re self-employed and earn a 1099 income, taxes are not withheld when you’re paid. If that’s the case, be sure to put money aside each month to pay your tax bill when you file with the IRS each year.
6. You Spend More Than 30% Of Your After-Tax Income on Your Rent Or Mortgage
As a general rule of thumb, you shouldn’t spend more than 30% of your net take-home pay on your monthly housing costs. This might be more difficult these days with rising costs and stubborn inflation, but it’s a solid benchmark to aim for. Be sure to calculate your take-home pay, multiply that by 30%, and divide by 12 to get your target monthly housing cost.
7. You Have A Negative Net Worth
If your expenses exceed your income for too long, it may be the case that you end up with a zero (or even a negative) net worth. Ultimately, what you owe exceeds the finances you have. If you find yourself in a deep financial hole, declaring bankruptcy might be an option, but this could limit your ability to borrow money in the future. Smart budgeting, careful spending, and active saving are all positive steps to turn your negative net worth into a positive one.
Ultimately, incurring too much debt can cause long-term financial consequences. Being aware of these seven warning signs and using the tips above can help you get out of — and stay out of — debt in the long run.
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