Recommendations vary on how much debt you should carry, and getting to an appropriate debt level may take time if you're deep in debt. In any case, recommendations on how much of your income should go toward bills and debt will give you a benchmark to size up your debt load and keep your debts under control.
Net Income Budget
To obtain a more realistic picture of how much you have to spend, use your net, or after-tax, income to determine what percentage should go toward your debts. Liz Weston, a personal finance expert for MSN Money, recommends reserving 50 percent of your net income for necessities, including your rent or mortgage, food, utilities, transportation and minimum payments on loans and credit cards. That leaves 30 percent of your income for entertainment and other things that aren't necessities under Weston's budget plan. The remaining 20 percent would be for savings, retirement fund contributions and any additional payments you want to make to reduce your debts faster.
Bankrate.com and other financial websites recommend keeping your debt-to-income ratio below 36 percent. That means that your monthly debt should consume less than 36 percent of your monthly income. However, you use your gross, or pre-tax, income to calculate this ratio, which excludes expenses for food, utilities and other necessities. Calculate your debt-to-income ratio by adding up your monthly costs for rent or mortgage, loans and minimum credit card payments. Divide that total by your gross monthly income and multiply the resulting number by 100. If this total shows that your debt consumes more than 36 percent of your monthly income, you have too much debt in comparison to income.
The SmartMoney website notes that the U.S. Federal Reserve Board considers your to be in financial trouble if your debt obligations exceed 40 percent of your gross income. However, the website asserts that you also have cause for concern if your debts exceed 30 percent of your gross income. SmartMoney notes that you would have just 20 percent of your salary left to cover expenses if taxes take 25 percent, debts consume another 40 percent and you save 15 percent of your income.
Becuase advice on debt management varies, it's difficult to determine exactly how much of your income should go toward paying debts. However, the ultimate goal of all recommendations is to help you keep spending and debt accumulation in check and to increase your savings. Therefore, the best approach may be to pick a plan that you're likely to follow and weigh your success with that plan after a few months. Adjust your plan as needed to increase your savings and reduce your debts.