11 Feb What Percentage of My Salary Should I Use to Pay off Debt?

Have you ever wondered how much of your salary should actually go toward your debt? There’s a lot of conflicting information online about how much of your salary should go toward your debt. Some people say no more than 10%, some 30%, and some say as much as 70% is okay, as long as you can afford living expenses.

According to research on this topic by experts in the field, 60% is too much to spend on your debt. If you spend more than half of your salary on debt, you likely have too much debt and might struggle to afford living expenses or repayments.

Often, housing, insurance, transportation, and healthcare take up a large a large percentage of your income. When more than half of your income is spent on debt, there’s a high chance that you’ll struggle to make minimum payments or afford essential expenses, leading you to cut corners (often with more loans), which could have long-term negative effects on your financial and mental well-being.

Let’s discuss why spending more than 60% of your income on debt is dangerous and what you should do if you face this problem.

Why Spending 60% Or More of Your Salary on Debt Is Dangerous

Spending 60% of your salary on debt can lead to the loss of your emergency fund, taking out predatory loans (such as payday loans), the loss of progress toward financial goals, a high debt-to-income ratio, and stress and burnout.

Loss of Your Emergency Fund

Saving for emergencies is an essential part of financial fitness and health. When you have an emergency fund, you won’t have to take out loans for events like car breakdowns, medical emergencies, or loss of income. If most of your income is lost to debt repayment, you likely won’t be able to afford this fund.

Predatory Loans to Stay Afloat

If you’re struggling to make repayments, you might take out loans like payday loans from companies that promise that “blacklisted” applicants are accepted. These companies charge exorbitant interest rates to make up the income they would lose in the likely event of your default, making payday loans heighten the amount of debt you pay each month on top of the 60%.

Loss of Progress Toward Financial Goals

If you use your savings to pay off debt, you’ll lose the progress you’ve made toward financial planning goals like saving for a car or house. You shouldn’t have to dip into your hard-earned savings to make repayments – this is a surefire sign you’re paying too much on your debt. Saving for future goals can become impossible when such a large portion of your income is spent on debt repayments.

High Debt-to-Income Ratio

A debt-to-income ratio, or DTI, is how much debt you have compared to what you make every month. Lenders often view a high DTI as a reg flag. It signals you’re credit-reliant. Spending 60% of your salary to pay off debt could stop you from qualifying for reputable loans in the future.

How to Work Out How Much You Spend on Debt Repayments

Here’s how to work out how much of your income you put toward debt repayments. First, list all of your debts, interest rates, and fees you have to pay on debts. Include minimum monthly payments, admin fees, and interest rates. Calculate the interest on your repayments, then add your monthly repayments, monthly interest rates, and monthly admin fees.

Divide your repayment by your salary, then multiply by 100. This is your debt-to-income ratio.

Example: In total, Anna pays R10,350 in repayments, R2,251.13 in interest, and R440 in monthly fees. Anna pays R13,041.13, which is 65.21% of her income (R20,000). She has bad debt.

What to Do If You’re Spending Too Much on Debt Repayments

If you spend 60% or more of your salary on debt, you’re eligible for debt counselling. Debt review is a legal process wherein a debt counsellor negotiates for reduced interest rates and less on repayments. Once your creditors have been notified you’re under debt review, you’re automatically granted legal protection from being sued by creditors.

Once you’ve finished paying your creditors back, you’ll get a clearance certificate from your debt counsellor. You can use this to dispute the record of debt and debt review from your credit profile, making you eligible to begin rebuilding your credit responsibly.

True North Debt has years of experience in the debt counselling space. Our team of experts can help you overcome over-indebtedness and take your first steps to financial freedom. Live debt-free – contact us today.