What is a reasonable percent of income used to pay interest on consumer debt?
I was looking at a breakdown of the Ontario government debt and 11% of tax dollars go to pay interest. I am interested to compare with personal finances, would 11% of annual income as interest be reasonable? What percent of income going to interest is common? Ideal?
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11% of (Ontario) tax dollars go to pay interest
I am interested to compare with personal finances, would 11% of annual income as interest be reasonable? What percent of income going to interest is common? Ideal?
You're conflating good debt (building and maintaining infrastructure) with B-A-D BAD debt (living beyond your means).
It's also dangerous to conflate debt incurred by a government which gets it's money via continuous tax streams vs. individuals who can lose their jobs.
(This is not to say that governments can never go bankrupt. Just look at Detroit, for example.)
What percent of income going to interest is [...] Ideal?
0%
It might have sense for the government to borrow as an inversion: with the money they have today they build infrastructures, public services, etc. that will in turn help the economy grow which will mean more revenue and less spending (e.g. social spending) in the future1.
You are not a government, and your consumer debt is, in general, not an inversion2. Getting in debt to buy that shiny iPhone instead of a more basic phone will not help you get better income later on.
Additionally, the credit rating of the government will usually be way better than yours, so the government can get money by paying a far lower interest than you do. This is specially true if you compare it with a consumer loan, which usually has a rather high rate.
And if all goes south, the government often has the option to increase taxes to increase revenue and paid loans, while your ability to increase your income is limited3.
1And of course some would argue that the government spending 11% on interest is far from being ideal, too.
2There could be some exceptional case, like needing a vehicle to get to work. But even in that case you should aim at the minimum needed to cover your actual needs and do not get any more debt than necessary.
Another exception would be a mortgage, as you are paying interest for the loan but A) it is usually cheaper and B) you are at the same time avoiding to pay rent.
3If you could easily increase your income now you would already have done it, wouldn't you?
Many personal finance guidelines recommend spending no more than 20% of your after-tax income on servicing debt.
Note that the 20% recommendation is for savings + debt combined. So as you pay off debt, whatever is left in that 20% goes towards saving. Once you are debt-free, continue to save 20% of your income. Step 3 = profit!
Sources:
www.thebalance.com/the-50-30-20-rule-of-thumb-453922 www.creditkarma.com/advice/i/50-30-20-rule/
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