How Much of Your Income Should You Dedicate To Paying Down Debt?

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If you have debt, paying it down should be one of your top financial priorities. That’s because the longer your debt lingers, the more expensive it gets thanks to interest. But how much of your income should you ideally be setting aside for debt repayment?

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Here’s a look at how much most Americans put toward debt repayment and how much experts say is the ideal amount.

The Average American Devotes Nearly One-Third of Their Income to Debt Repayment

The average American puts a significant amount of their income — 32% — toward paying down debt other than mortgages, according to Northwestern Mutual’s 2022 Planning & Progress Study. Whether or not this is a reasonable percentage will depend on your personal financial circumstances, said Jeffrey Jackman, a Greensboro, North Carolina-based wealth management advisor at Northwestern Mutual.

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“Everyone’s financial situations are different so there is no one-size-fits-all answer to how much of your monthly income should be spent paying down debt,” he said. “That said, the CFP Board recommends that your total debt payments between all sources of debt — mortgages, auto, credit cards, etc. — be less than 36% of your gross income. For example, a family with an annual household gross income of $100,000 ideally shouldn’t have more than $36,000 per year — or $3,000 per month — going toward debt.”

To determine how much you should be putting toward debt repayment, you should first create an overall budget that allows you to keep track of your monthly income and estimated expenses, Jackman said.

“From there, you will be able to see how much you have left over and be able to determine how much you want/need to allocate toward paying down debt each month versus what you may want to stash away in savings, put to work in investments, contribute toward an emergency fund, etc.,” he said. “An advisor can help you put a budget and debt repayment plan in place that accounts for your full financial picture and helps you stay on track to reach your broader financial goals.”

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How To Prioritize Paying Down Non-Mortgage Debt

Once you figure out how much of your income you can dedicate to paying down debt, you should determine which debts you will focus on paying down first.

“A good rule of thumb is to start by making the minimum required payments on each source of debt, so you avoid racking up additional late fees and penalties,” Jackman said. “From there, it often makes sense to prioritize paying down debt with the highest levels of interest. Credit cards, for example, tend to have heftier interest charges than other common forms of debt. They are also by far the largest source of personal debt for Americans, excluding mortgages, according to data from our study.

“Paying more toward those higher interest forms of debt now can ultimately help you save more in the long run,” he continued. “For many, this will look like paying down credit cards first, then personal loans, auto loans and student loans, and finally home equity loans as a lowest priority. Make sure you take a close look at your total debt balances and corresponding interest rates before deciding where to put your dollars first.”

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Should You Prioritize Paying Down Debt or Saving Money?

According to the Northwestern Mutual study, 57% of Americans prioritize paying down debt while 43% put saving first — but which should be the priority?

“The decision of whether to prioritize saving for retirement versus paying down debt is largely dependent on your unique goals, time frame and current financial situation,” Jackman said. “If you’re in a position where you have a lot of high-interest debt or have a longer time horizon before your retirement years, it may make sense to pay down debt as much as possible in the near term before shifting focus to saving for retirement. On the other hand, if you have mainly low-interest debt or are approaching retirement, it may be more prudent to prioritize saving.

“Other factors to consider include tax benefits and eligibility for programs like federal student loan forgiveness,” he continued. “There is also a psychological element to this. Debt can often be overwhelming and cause feelings of anxiety. If your debt is causing you stress, paying it down sooner rather than later may be worth it so you can have financial peace of mind.”

In general, when it comes to saving for retirement, you should try to contribute at least your employer match, Jackman said.

“A dollar-for-dollar match in your retirement plan is like getting free money for your retirement fund,” he said. “If they provide a 4% match, you should be making a 4% contribution if possible to maximize the value of the match. Avoid missing out on this match whenever possible.”

Ideally, you can pay down your debt while also saving for the future.

“Becoming debt-free and ensuring financial security in retirement are both important long-term goals to work toward; but remember, you can’t go back in time to catch up on retirement savings if you don’t save enough throughout your lifetime,” Jackman said. “It’s a smart idea to get ahead on saving as much for retirement as possible, even while you are paying off debt. It’s about finding the right balance that works within the context of your broader financial plan and being aware of how that balance might shift over time. Getting professional help can be a great way to ensure you are allocating your money appropriately and that your plan to reach both objectives stays up to date no matter how your financial situation changes.”

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About the Author

Gabrielle joined GOBankingRates in 2017 and brings with her a decade of experience in the journalism industry. Before joining the team, she was a staff writer-reporter for People Magazine and People.com. Her work has also appeared on E! Online, Us Weekly, Patch, Sweety High and Discover Los Angeles, and she has been featured on “Good Morning America” as a celebrity news expert. 
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