Should debt be a part of your budget?
Jordann over at My Alternate Life brought up an interesting point, saying that debt should not be part of your budget.
It clearly shows debt as part of a balanced budget. I think this sends entirely the wrong message.
This pie chart makes it seem like debt is normal, and the truth is, for the vast majority of North Americans, it is.
For most people, there will always be debt, whether it’s a car payment, student loans, or a mortgage, debt is constant.
For the record, it’s this bad boy:
While I really like her point about debt not being seen as “normal”, the reason why a lot of budgeting sites (including mine) shows debt repayment as 15% of your budget is for a few reasons which I’d like to list out and clarify:
1. PEOPLE WHO BUDGET FOR THE FIRST TIME ARE CLUELESS
I was, anyway. Maybe I’m dumber than most (very likely) but about 10 years ago, I didn’t even know what a budget was.
I didn’t have a budget and I didn’t even know where to start, so I looked at the given pie chart and went: Ah hah!
I built a preliminary budget based on those percentages and then tweaked it depending on how I lived.
For instance, my housing was outrageous. I was paying something like $1600 a month for an apartment and it was more than 25% of my net income, around 38% at the time!
When I saw that my housing should really roughly be around 25% and I was over by a good 13%, I got rid of the apartment, turned into a minimalist and yadda yadda…
2. THE PERCENTAGES ARE JUST GUIDELINES SO YOU DON’T BURN OUT
15% for debt repayment is low but reasonable, but don’t forget that the budget also says to put 10% towards savings.
Let’s say you have $2000 a month to budget
15% of that is $300. That’s a reasonable amount to put towards you debt (assuming the minimum payment is less than $300 of course), and it still leaves you about $1700 to cover everything else.
Debt fatigue is VERY real, and a lot of people when they first start getting out of debt (myself included), get super excited and ambitious about clearing it ASAP… without realizing that 5 years is a long time to be living without any fun.
3. COMMON SENSE DICTATES WHATEVER MONEY IS LEFT OVER, SHOULD GO ONTO YOUR DEBT
When I was getting out of debt, I saw the budget percentages, followed them for a few months then I ignored all of that later on and put 90% of my money towards my debt because I could.
I was able to do this because I became a modern nomad, living out of hotels working on projects in different cities, but I never once thought:
Hey, 15% for debt, that’s all I’m going to pay towards it!
… but if I had originally set my targets to 90% to go towards debt, or even 25% while paying rent and buying groceries, I would have felt trapped and undoubtedly burned out from repaying it to the point where debt fatigue sets in.
4. NO ONE IS SUGGESTING TO TAKE ON MORE DEBT TO “BALANCE A BUDGET”
The point that Jordann makes which I think should be clarified is that no one is saying you should take out a car loan, get a mortgage or take out student loans to have a “healthy” budget.
If you don’t have any debt, you’re at the peak of financial health. Stick that 15% for debt into savings, and ramp your savings up to 25% every month (or more, if you can hack it).
5. IF YOU ARE THINKING ABOUT BUDGETING, YOU ARE PROBABLY IN DEBT
My last point is that I never had a budget before I graduated and started working because I wasn’t technically in debt.
Yes, I was in school, racking up student debt, but it didn’t become real to me until I graduated, got a job, and got a piece of paper in the mail saying I owed $60,000 with the minimum payment being $_____ charging a rate of ____% a day. (!!)
It was at that point that I realized that I should probably start learning how to manage my money so I could pay for rent, food and my debt.