What Budget Percent to Allocate Toward Debt?

A budget will divide your income and spend it on different categories in your budget. Percentages can be used to determine if your spending is within reasonable amounts. However, if you are very wealthy or very poor, the percentages will be skewed and there may not be enough money in your budget to bring the percentages in line with national averages. However the percentage you put towards debt can indicate your financial wellness.

Safe Percentage

It is best if you can keep your debt payments below 25 percent of your monthly income. This includes your house payment, as well as any consumer debt you may have accrued. If you can live frugally, you may be able to raise that amount to 30 percent. However, any higher and will be in danger of having financial difficulties in the future.

Paying Off Debt

Your percentage may be higher if you are working on reducing current debt load. A debt payment plan can help you focus the extra money you put towards your debt. By applying all of the extra money towards one debt at a time, you are freeing up more money for future debts and speeding up how quickly you pay off debt. List your debts in order from highest interest rate to the lowest one to create your debt. If you are paying extra money towards debt, you should be as concerned with the percentage you are paying, because it will help you reach your financial goals more quickly to be debt free.

Debt-to-Income Ratio

Lenders will look at your debt-to-income ratio to determine if you are at risk of defaulting on your loan. This number is taken by dividing your monthly debt payments by your monthly income. This is the same number as the percentage of your budget towards your debt. Ideally, you should keep the number below 25 percent, but lenders will continue to lend to you until you get close to 50 percent.

Staying Out of Debt

If you are debt-free, you will not need to worry about your debt-to-income ratio. Creating a plan will help you get out of debt, but choosing to save up for major purchases and to stop using your credit cards will prevent you for going into debt. An emergency fund will provide savings to cover the unexpected expenses that come up and help you to stay debt-free.