Debt servicing costs should not exceed 30 per cent of income

Debt is useful for buying assets and leveraging to increase our wealth. But how much debt is too much?

For the average Australian, debt servicing costs should not exceed 30 per cent of income. The percentage can vary depending on your income and expenses, but 30 per cent is a good rule of thumb. High-income earners might have a slightly higher debt servicing income ratio because living expenses are typically a smaller proportion of their income.

To figure out your debt servicing cost, divide your monthly interest paid on your debts by your monthly income.

For example, if your monthly net income was $5,000 and monthly payments + interest paid on your debts amounted to $2,000, your debt servicing costs would be 2000/5000 x 100 = 40%. In this case, you would want to reduce your required monthly debt payments by $500 per month to meet your 30% target.