3 signs you’re in too much debt

Debt’s a great little concept isn’t it? It’s a way to buy what you can’t afford.

Remember when you were a kid, and you desperately wanted that BMX bike? Chances are the profit you made from that lemonade stand wasn’t going to cover it. You had to ask your parents for the bike, and they usually made you wait until Christmas or your birthday.

As an adult, it’s different. You can buy what you want, when you want it. And, if you don’t have the money on you, you ask someone else to help you out, aka: the bank. If when it comes time to pay, and you don’t have the money, whatever you originally bought is taken away from you, or you end up paying more than you needed to with extra fees and charges.

Also read: How one couple saved $1 million in 4 years and retired by age 43

Right now, in Australia, households are carrying too much debt. Even Glenn Stevens, the country’s top banker, agrees. He’s the governor of the Reserve Bank of Australia. He gave his final speech as governor a couple of weeks ago and had this to say:

“Gross public debt, if you add up all levels of government, is about 40 per cent of GDP," Mr Stevens said.

"We're rightly concerned about the trajectory of that ratio in to the future, but gross household debt is three times that size, it's 125 per cent of GDP.

"That’s not unmanageable, but nor is it a low figure."

So how do you know if you are too deep in debt?

You can’t afford a night out

Just because interest rates are at record lows, doesn’t mean you have to take advantage of them. People are doing just that though. Last month ING reported a backlog of home loan applications. Borrowers rushed to take out a loan after the Reserve Bank dropped the official cash rate to a new record low of 1.5 per cent.

There are two things that can go wrong though if you start swimming out of your depth in the debt pool: either interest rates rise, and you find you can’t make your monthly repayments; or the economy slows further, producing deflation (falling prices and wages), and the amount of debt you hold, as a proportion of your income, becomes larger.

Either way, if you find your financial situation is getting tighter and tighter and can’t afford to eat out once a week, or enjoy that long weekend in the country you’ve been looking forward to for six months, or buy tickets to that football grand final, you’ve got too much debt.

Simply put, if your budget buffer is less than a few thousand dollars (on an average income), you’re in too deep.

Also read: 5 ways to become a millionaire in your 20s

Stress

When we get stressed we produce a hormone called cortisol. It’s released in response to stress and low blood-glucose concentration. It’s our body’s way of telling us things aren’t ok.

It’s ok to have the occasional rush of cortisol, but a sustained, elevated level of cortisol is not healthy. It can lead to other health problems and leave you feeling unable to cope. If you’re dealing with financial anxiety every month, and it’s heightened when the mortgage repayment or credit card bill is due, you’re in danger of raising your levels of stress beyond what’s healthy.

Now obviously there are different levels of stress and anxiety. If you know you can afford something but the money is delayed, or there’s some sort of hiccup, then you can generally negotiate mew payment terms with your bank. But if you’ve no idea where you’ll get the money from, chances are you’re in over your head.

Relationship problems

If there’s one thing that can turn people who love each other into bitter enemies, it’s money.

When you’re single, the buck stops with you. If you’re married, or you live with someone, you have to share the burden of budgeting. The thing is that people deal with money stress very differently. Some sweep it under the rug, while others are constantly checking their bank account.

If you find you’re getting into a weekly argument with your partner about money, chances are you’re swimming in too much debt.

Always remember, you can control how much debt you take on, but you can’t always control how much money you’re able to bring in.

Also read: 3 saving hacks to get your home deposit together faster

Simple solution - Budget

Yes, yes, I know, as soon as you hear the word “budget” everyone’s eyes glaze over. And rightly so! It’s an incredibly dull subject. Here’s the thing though, get your budget right and life will be a heck of a lot more relaxing for you. You may have to tolerate a lower standard of living for a time (if you find you’re overspending), but it sure beats stress and relationship problems.

Here’s my tip: set aside a couple of hours. Grab your laptop or PC and pull up a spreadsheet. Don’t worry if you’ve never used a spreadsheet before, it’s easy.

Put in two columns: revenue and expenses (including debt repayments), and put your balance and the bottom.

If you’re unsure of how to run a “macro”, just Google it, or watch a short video explanation on how to do it on YouTube. When you run a macro you’ll be able to change individual items on your budget and see how it affects your balance without having to re-calculate everything again.

Be conservative, underestimate your revenue, and overestimate your expenses. Also be sure to include one-items. The one thing you can be sure of in life is unexpected expenses!

Another handy hint is to collect all your receipts into a shoebox one month and use that as a guide to your expenses.

It’s ok if your budget’s in deficit in any given year, as long as you know how to get it back in surplus, and your bank’s ok with that.

Also read: Here's how much debt Trump's companies really have

Take control again

When you lay your finances bare in front of you, things become a lot clearer. You can decide what to spend on, and what you can’t afford. One thing that may become obvious to you is that doing the hard yards of saving a little bit here and there probably won’t help you much. The best way to bring your finances back into line is to eliminate some big ticket items. That may be as simple as shopping in a cheaper grocery store, or living with one car rather than two.

Of course at the other end of the scale, if you budget correctly, and you’re on top of your finances, obtaining that dream home, taking that overseas holiday and dining out at that fancy restaurant, are all possible... and guilt free!

Managing money was never meant to be hard, but sometimes we can make it that way. Life is much easier in the short term when you bury your head in the sand, but much, much harder in the long run.

Don’t let debt beat you down, beat it down first with some common sense and a little planning.

David Taylor is a journalist with the ABC. Before taking up a position with the ABC, David was a financial markets analyst and economics commentator. You can follow him on Twitter: @DavidTaylorABC.