Can you afford debt?

by: Ken Rowan, CA-CIRP | Feb Thu 28, 2013 2:59 PM | 0 comment
Can you afford debt?

Joel Kurtzman, publisher of The Milken Institute Review, wrote a first-class article on the affordability of US government debt. That debt exceeds $16 trillion and is 102% of GDP.  TRILLION! 

But, only 1.4% of GDP is required to pay the interest expense on that debt.

If you have a $25,000 line of credit, assuming your interest rate is prime (currently 3%) plus 1, and you are paying interest-only, then you are probably paying about $83 monthly on that credit line.  You might be paying more for life insurance on the loan.  "Interest-only" means the debt's not going down, but you are paying a nominal amount - it seems affordable.

If interest rates went up, which is what we are told to fear, how does your payment chnage?  Let's get really bold here and say the prime rate goes up by 2% so your prime plus 1 interest rate jumps from 4% to 6%.  Well your payment goes up by 2%, or $42 monthly. Yes, it will be tighter - that's about half a monthly bus pass.

Interest rates are not going to go down by 2%.  They're only going to go up, but you might have to tighten your belt only just a little bit. 

The best way to analyze this is to take a look at your budget and especially your expected income.  At that level of income is your debt affordable?  The rule of thumb is that your monthly debt payments should not exceed 20% of your net monthly income.

Contact a Licensed Insolvency Trustee if you need help with your budget. 

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