Long-term debt is typically defined as loans that are scheduled to be paid for more than 12 months. Most often, this is your mortgage, student loans, or a loan tied to an asset like a boat, RV, automobile, etc. Is long-term debt a bad idea? Should you pay it off early? How much debt is too much debt?
It’s important to note that each person’s financial plan is unique to their needs, income, risk tolerance, and short and long-term goals. The essential part of handling debt is to ensure that it fits into your holistic financial plan. If you haven’t already, talk with your financial professional to ensure you are managing your long-term debt responsibly.
How much debt should you carry? When answering this question, you need to look at your debt-to-equity ratio (DTI). The debt-to-equity ratio is a tool to measure the amount of debt an individual has compared to their assets (equity). Take your total debt and divide it by your total assets. For example, a person with $150,000 in debt and assets, or equity, of $300,000 has a debt-to-equity ratio of 50%. Each person’s finances are unique, and the debt to equity ratio should typically match your age and stage of life. For example, if you are a young couple, you may have a little higher DTI somewhere near .80 or 80%, whereas you mature and gain assets and pay off the debt, you may look to be closer to .50 or 50%.
Should you pay off your debt early? Maybe. If you have very low interest on your debts, it may be best not to pay them off early. However, it may be that you don’t like the risk associated with debt and want to pay off your debt as quickly as possible. Remember, the number one rule of finance is that you have to sleep at night.
Talk with your financial professional today about the best way to manage your debt.