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We’ve all been hearing a lot about the debt ceiling in the news lately and you may be wondering what it is:
The debt ceiling is the legal limit set by the U.S. government on the amount of debt that can be issued by the Treasury Department. It is the total amount of money the government is allowed to borrow to meet its financial obligations, such as paying for government programs, benefits, and interests on existing debt. If the government needs to borrow more money than the debt ceiling allows, Congress must raise the debt ceiling in order for the government to continue to borrow. Failure to raise the debt ceiling in time could cause the government to default on its debt which would have severe economic consequences.
What is a personal debt ceiling?
A personal debt ceiling is a limit on spending and the amount of debt a household or individual is willing to take on, whether a cap for investment purchases or the debt number that makes you change your life around.
For investment purchases such as a home renovation or a business loan, there should be a hard cap that one sets to keep them from being significantly over leveraged.
For those who already have debt, there should be a limit, or ceiling if you will, of what you’re willing to continue to have in debt. This is not advocating for setting a specific dollar amount in debt before tackling it. If you have any debt outside of a mortgage that you’re not severely underwater in, they should be paid off completely, or at the very least a plan to lower that debt.
For students, student loans are the first encounter with loans and debt. It’s important to really consider how much student loan debt is too much debt. A good rule of thumb should be don’t take out any more than you need. If your potential earnings in the first year out of college is $50,000, you shouldn’t take out more than $25,000 as it will become very difficult to pay off this balance in a short period of time.
Why avoid debt?
We should all be having a personal debt ceiling. Debt can dramatically change the course someone is on in their financial journey. While some financial gurus will tell you some debt is good and can be used as leverage when making investments such as real estate, for most people, debt can lead to a number of financial problems. For example, high-interest charges on debt can quickly add up, making it difficult to pay off what you owe. The average credit card interest rate ranges between 20-23%. This can lead to a cycle of debt, where you are constantly making payments but never reducing the amount you owe. Additionally, having a lot of debt can limit your financial flexibility. You may not be able to save for your future or make important investments because you are constantly making payments on your debt. Additionally, high levels of debt can also cause stress and negatively impact your mental and physical well-being. Furthermore, having high levels of debt can also make it difficult to obtain new credit or loans when you need them, which can limit your ability to make important purchases or investments. Overall, while some debt can be manageable and even beneficial, too much debt can be detrimental to your financial well-being.
Here are a few tips for controlling debt:
- Create a budget: This will help you understand your income and expenses and identify areas where you can cut back to allocate more money to debt repayment.
- Prioritize high-interest debt: Pay off credit card debt and other high-interest loans first, as these will cost you the most in interest charges over time.
- Make more than the minimum payment: When paying off debt, try to pay more than the minimum amount due each month to reduce your overall interest charges.
- Consolidate debt: Consider consolidating multiple credit card balances or loans into one lower-interest payment to make it easier to manage.
- Avoid new debt: Avoid taking on new debt while you are paying off existing debt. This will keep you from falling deeper into debt and make it easier to pay off what you owe.
- Avoid impulse buying or unnecessary expenses: Stick to your budget and avoid buying items that you do not need or can’t afford.
- Seek professional help if needed: If you are struggling to get a handle on your debt, consider seeking help from a financial advisor or credit counselor.