What is the 20/10 rule for debt payments?

The 20/10 rule is a guideline to help you determine whether you are spending too much on debt excluding payments on a mortgage.  Under the 20/10 rule, consumer debt (not including a mortgage) should not exceed 20% of your annual take-home pay after deductions and debt payments should not exceed 10% of your monthly take-home pay after deductions.  The reason for this guideline is to ensure after debt payments, you have enough income remaining to cover all the basic necessities of life and still have income available for other financial goals such as saving for emergencies and retirement.  If debt payments are higher than these guidelines, you might be forced to go without some basic necessities or be forced to take on more debt every time an emergency comes up because you lack resources to build a proper emergency fund.  Unfortunately for some people, this can lead to a viscous cycle of increasing debt over time.

To illustrate the 20/10 rule, consider a person who earns $32,000 net take-home, per year after mandatory deductions.  This would be equivalent to someone earning approximately $40,000 per year, gross income before deductions or someone earning $19-20 per hour based on a 40-hour work week, 52 weeks per year.  For this specific situation, the 20/10 rule dictates this person should not have more than $6,400 in consumer debt besides a mortgage ($32,000 x 20%).  Furthermore, payments on this debt should not exceed $267 per month ($32,000/12 months x 10%).

Being in excess of the recommended guideline does not mean you definitely have a debt problem as other factors need to be considered such as your living situation, household income besides your own and whether future income is increasing beyond the rate of inflation.  If you feel like debt is becoming harder to service and you simply do not earn enough to ever get ahead, there are options worth considering.

If you are looking for advice, or a second opinion about your debt, it does not cost anything to talk about your options. Every financial situation is unique and viable options can differ from person to person.  A conversation free of judgment, is the first step to determine options for debt that make sense for you.  For a free consultation, please call or text (506) 645-1814 or email jaime@tackledebt.ca; or visit www.tackledebt.ca.