For many Americans, debt has become a way of life. A recent LendingTree analysis of the latest Federal Reserve data showed that total U.S. consumer debt is on track to exceed $4 trillion this year. The analysis showed Americans collectively owe more than 26 percent of their monthly income on consumer debt, including car loans, credit card accounts and student or personal loans.
Living within one’s means may seem quaint or old-fashioned, but it’s the most tried- and-true way for most people to acquire financial security. Before you take out a loan for that shiny sedan or charge up your VISA card for the latest gadget, ask yourself three crucial questions:
- Can I afford the payments? If your current income qualifies, some lenders may push you into loans that devour cash like a hungry hyena. Don’t fall for it. The housing crisis was the result, in part, of mortgage defaults. In other words, people took out loans that exceeded their ability to repay. When savings were drained, foreclosures became inevitable.
As a general rule, your housing payment (including property taxes and insurance) should not exceed 30 percent of your gross income.
- How close am I to retirement? If you’re tempted to borrow for that trip to Europe, take a deep breath. Consider the long-term consequences. These days, many people can expect to live decades after they step down from full-time employment. What’s your priority? Contributions to your retirement accounts or the transient thrill of an impulse purchase?
- Can I wait until later? By paying cash for purchases, you can avoid interest charges and generally spend less in the long run. An unscrupulous lender may gladly finance your toys and vacations, but think long and hard about the impact on your bank account.