Am I in debt? This is one of the questions that we are commonly asked. The answer to this question is not always as simple as it may seem.
Millions of adult Americans are in debt, but what does it really mean to be in debt? In America, more than 64 million people carry credit card debt. In an article posted by the First Republic, it was found that more than 340 million Americans carry another form of debt. This includes things like mortgages, car payments, student loans, and other miscellaneous bills. So the definition of being in debt can be quite broad.
But, having a debt doesn’t really mean or feel like being in “debt.” So, how can one really say they are in debt? Well, there are a few different ways. In this article, we will talk about some common reasons people end up in debt and what one’s situation is like to be considered in debt.
Understanding Different Types of Debt
In its simplest form, debt is when you owe someone money. However, there are different types of debt with different terms, conditions, and requirements. Here are some of the different types of debt:
1. Secured Debt
One of the most common types of debt is secured debt. This is when you use an asset, like your home or car, as collateral for a loan. The lender can take back your property if you don’t make the payments on time.
2. Unsecured Debt
Another common type of debt, unsecured debt isn’t backed by any collateral, unlike secured debt. Examples of unsecured debt include credit card debt, medical bills, and personal loans. It depends on the borrower’s creditworthiness to determine the interest rate.
3. Revolving Debt
Just as its name suggests, revolving debt is a type of debt that revolves or renews itself. The most common type of revolving debt is a credit card. When you make a payment, the amount becomes available to you again (up to your credit limit). Another great example is when you, the borrower, borrow from another party and then repay that party, and the funds become available to you again.
Commonly associated with homeownership, a mortgage is a type of loan that’s used to finance the purchase of a home. The house is collateral for the debt on which you’ll make periodic payments, usually over a 15- to 30-year term.
5. Student Loans
Similar to a mortgage, student loans are used to finance education. These loans are available from the federal government, private lenders, and schools. The borrower will be required to make periodic payments, typically over a 10-year standard repayment plan.
When Can One Say They Are In Debt?
As mentioned, a borrower or someone who owes another person money doesn’t necessarily fall into the “debt” category. To be in debt, there are a few different situations that can apply.
1. You Have More Debt Than You Can Afford
If your monthly income doesn’t cover your minimum payments, you’re considered to be in debt. This is because you can’t pay off what you owe within a month’s time or your debt is eating too much of your budget.
Take for example you are earning $5,000 per month, and your minimum payments are $2,000. You would have $3,000 left over for other bills and expenses. But, if your minimum payments went up to $3,000, you would only have $2,000 left over, which isn’t enough to cover other necessary expenses. There’s no specific percentage of income that you should aim for, but it is generally recommended to keep your debt payments below 36% of your income.
2. Your Debt is Costing You More Than It Should
In many ways, debt can be some form of investment. Take for example having debt due to having to purchase a house. The idea is that the money you borrow returns to you in the form of equity. However, this isn’t always the case.
There are times when debt can actually end up costing you more money than it should. This is usually because of high-interest rates. For example, let’s say you have a credit card with an interest rate of 20%. If you only make the minimum payments, it will take you years to pay off the debt and you will end up paying a lot more in interest. This is why it’s important to try to get a lower interest rate when you can.
3. Your Debt Is Causing You Emotional Stress
It doesn’t always have to be a money thing. Debts are usually easy to overcome given that you have a proper plan and method to do so. However, some debt can cause emotional stress. This is usually due to the fact that it’s something you’re struggling to overcome because it reminds you of a difficult time in your life or it is affecting your current lifestyle.
For example, let’s say you’re in debt because you had to use your credit card to pay for an unexpected car repair. This debt may not be a lot, but it can cause emotional stress because it’s something you weren’t expecting and now you have to find a way to pay it off.
The Bottom Line
Answering the question, “Am I in debt?” can be difficult. It really all comes down to your individual situation and how you’re feeling about it. Some can have hundreds of thousands in debt but they do well in managing it while others may have a tiny debt but feel like they’re drowning in it.
At the end of the day, it’s up to you to decide whether or not you’re in debt. After all, accepting something is wrong is the first step to solving the problem. Take a step back and take a deep breath, carefully plan a structure to get out of debt, and always remember that you’re not alone in this. There are plenty of people who have been in your shoes before and have come out successfully on the other side.
Finny the Finance Bot says…
What does it mean to be in debt?
You’re in debt if you owe money to creditors, such as banks, credit card companies, or other lenders. To determine if you’re in debt, you can take the following steps:
- Gather all your bills and statements: Collect all your bills, credit card statements, and loan statements in one place.
- Total your debts: Add up all the money you owe to creditors, including the interest and fees that have accumulated.
- Calculate your debt-to-income ratio: Divide your total debts by your gross (pre-tax) monthly income. A ratio of 43% or less is considered healthy, but a ratio of 50% or higher indicates that you may be struggling with debt.
- Evaluate your debt burden: Take a look at how your debts are affecting your ability to meet your financial obligations, such as paying bills on time and saving for the future.
By evaluating your debt, you can determine the extent to which it’s impacting your financial well-being and take steps to reduce or manage your debt if necessary.
The author generated Finny the Finance Bot’s text in part with GPT-3, OpenAI’s large-scale language-generation model. Upon generating draft language, the author reviewed, edited, and revised the language to their own liking and takes ultimate responsibility for the content of this publication.