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Nearly every American carries some kind of debt, whether they're paying for a house, a college degree or a new laptop. And you're not alone if you wonder just how much income should be allocated toward paying off credit cards, car loans, student loans and/or your mortgage each month?
Generally, a good overarching rule to follow is to pay as much as you can each month in excess of the minimum payment.
"This will not only help you pay off your debt sooner but can save you a significant amount of money in interest payments," says Bola Sokunbi, a certified financial education instructor and author of "Clever Girl Finance."
Paying more than the minimum may seem obvious, but it's a good habit to practice if you've got extra cash. For more specific guidelines for paying off your debt, Select spoke to a few experts to get their best advice.
Follow the 50/30/20 rule
The 50/30/20 rule is a simple budget technique that breaks your spending into three categories. It recommends you spend up to 50% of your monthly after-tax income (aka net income) toward essential expenses ("needs") like your mortgage payment, utility bills, food and transportation. The next 30% should be allocated to your "wants" (dining out, vacations, etc.), and the remaining 20% goes toward your financial goals, whether that be paying off debt or saving for the future.
Depending on what kind of debt you have, it might fall in any of these three categories. Mortgages and car payments, for example, fall in the "needs" category.
"You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income," Mark Reyes, CFP and Albert financial advice expert, tells Select.
So if you bring home $5,000 per month (before taxes), your monthly mortgage payment should be no more than $1,400.
He recommends keeping your mortgage payment under 30% of your income ensures you have plenty of room for the rest of your needs.
If you carry credit card debt, Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC) recommends you prioritize credit card payments in the "needs" spending category. Carrying a credit card balance month over month can get very experience because of the high interest charges (usually in the double digits), so it's important to pay it off as quickly as possible.
For those who can't afford to pay off their credit card balance in full, McClary advises working toward a goal of putting 10% of your income toward this debt each month.
"Assuming that your mortgage or rent are going to consume the lion's share of that ["needs"] category, I recommend keeping credit card payments below 10% of your monthly take-home pay if you aren't in a position to affordably pay off your entire balance each month," he says.
Make sure that no more than 36% of monthly income goes toward debt
Financial institutions look at your debt-to-income ratio when considering whether to approve you for new products, like personal loans or mortgages. To calculate this number, divide your gross monthly income (your total income before taxes or other deductions are taken out) by the total amount of debt you carry (mortgage, credit cards, student loans and car loan payments). Then multiple by 100 to get the percentage.
For example, say your gross monthly income is $6,000 and you have $3,000 in debt payments each month across your mortgage, auto loan and student loans. Your debt-to-income ratio is 33%.
"From a lender's standpoint, they typically don't want to see more than 36% of gross monthly income being spent on debt," says Douglas Boneparth, CFP, president of Bone Fide Wealth and co-author of The Millennial Money Fix.
Don't stress too much if your debt-to-income ratio is higher than 36% if you factor in your mortgage — you're not alone. Data shows consumers are spending close to that on just non-mortgage debt.
The latest findings from Northwestern Mutual's 2021 Planning & Progress Study reveals that among U.S. adults aged 18-plus who carry debt, 30% of their monthly income on average goes toward paying off debt other than mortgages. By far, the top source of debt after mortgages is credit cards, accounting for more than double any other debt source.
Like most rules of thumb in personal finance, Boneparth warns that how much you spend each month to pay off your debt is ultimately subjective. You should consider your income, the type of debt you have, your savings and your broader financial goals.
"You might be more motivated to invest your disposable income than pay off your mortgage or student loan debt," says Leslie Tayne, a debt-relief attorney at Tayne Law Group. "But someone else may prioritize paying off a car or other high-interest debt like credit cards to be debt-free over everything else."
Make your debt repayment more manageable
If you're struggling with debt, there are steps you can take to make it more manageable, including refinancing your student loans, taking our a debt-consolidation loan or using a balance transfer credit card.
A balance transfer credit card can help you pay down your credit card balances faster by giving you an introductory interest-free period. The U.S. Bank Visa® Platinum Card offers 0% APR for the first 20 billing cycles on balance transfers (and purchases) so you have over a year to pay off your credit card debt without accruing more interest (after, 14.49% to 24.49% variable APR). The 0% introductory APR applies to balance transfers made within 60 days of account opening.
For a balance transfer card that also offers rewards, the Citi® Double Cash Card comes with 0% APR for the first 18 months on balance transfers (after, 13.99% to 23.99% variable APR). Balance transfers must be completed within four months of opening an account. Cardholders can also benefit from earning 2% cash back: 1% on all eligible purchases and an additional 1% after paying their credit card bill.
Bottom line
There are general guidelines you can follow to help you know whether you're on track for paying off your debt. On top of meeting the minimum payments, you can consider the 36% threshold number or work off of the 50/30/20 rule.
At the end of the day, however, how much you spend on your debt payoff really boils down to tailoring it to your personal financial situation and goals.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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