Money Management

The median payment-to-income ratio was 13.4% in 2022, according to the Federal Reserve. Learn how much debt is too much, relative to income. 

Taking on too much debt can lead to a lot of financial trouble. But it can sometimes be hard to tell if your borrowing is out of control or not.

That’s because the amount of debt that’s considered too much must be determined relative to your income. For someone making $1 million a year, for example, having $50,000 of debt may not be a big deal. But for someone with annual earnings of $20,000, that amount of debt could be a huge problem, depending on what kind of loans they are.

To see where you stand when it comes to what you owe, it may be helpful to look specifically at the percentage of income your fellow Americans are devoting to paying back creditors.

Here’s the amount the typical American pays towards their debts

According to the Federal Reserve, for people with debt, the median amount of debt per family relative to their assets was 29.2%. And, the median payment-to-income ratio on that debt was just 13.4%, which is the lowest on record. With a 13.4% payment-to-income ratio, a family with an income of $4,000 a month would be paying about $536 per month to their creditors.

The Federal Reserve also reported that only 6.5% of households had debt exceeding 40% of their income. This is an all-time low, and it’s a great sign that fewer people are so deeply in debt and taking on such high payments.

Do you have too much debt relative to your income?

To see how you compare to your fellow Americans, here’s how you calculate your debt-to-income ratio:

Add up your monthly payments to your creditorsDivide this by your income

Say you have the following monthly payments:

A $200 car loanA $100 credit card billA $250 personal loan

Your total debt would be $550. So if your income was $4,000 a month, your ratio would be 13.75% — or pretty close to your fellow Americans.

Now, whether you have too much debt depends on a lot of factors, including what kind of debt you have and what your financial goals are. For example, if you have mortgage debt, then your debt-to-income ratio can be much higher than if you have only consumer debt without it causing financial problems. That’s because you’re covering housing costs with your mortgage payment, whereas someone with consumer debt would still have rent on top of their bills to their other creditors.

If you have a mortgage, most experts recommend keeping housing costs to 28% of income or less, and keeping total debt payments including your housing costs and other debts to below around 36%. If you have only credit cards and no mortgage, though, you would be in big financial trouble if 36% of your entire income went to your credit cards alone and you had to cover housing and everything else with what was left over.

There are also some general rules of thumb for other kinds of debt. For example, you usually don’t want car loans to exceed 10% of income, and you should ideally try not to carry a balance or have any credit card debt since it is so expensive (as of November 2023 the average interest rate is 21.47% per the St. Louis Fed).

But while these rules of thumb can serve as a helpful guide, ultimately the best way to determine if too much of your income is going to debt is to consider how your monthly payments affect your ability to do what you want and need with your money. If you can’t save for retirement or for big purchases or you don’t have enough money to do the things you enjoy because of your debt payments, then you have a problem you need to solve.

If your debts are interfering with your life, consider moving to a smaller, cheaper home to cut your mortgage payment and making a serious plan to repay credit card debt or loans ASAP. You might also try switching to a cheaper used car or refinancing debt to reduce your monthly payments. Keep trying these techniques until you feel your debt is at a more manageable level and you’re improving your personal finances.

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Your choice of life insurance isn’t just term life versus whole life. Here’s why it’s worth considering universal life insurance, too. 

If you want to buy life insurance to protect your loved ones in case of your death, a common debate is whether it’s better to get term life insurance or whole life insurance. Term life insurance offers financial protection for a specific amount of time, or “term” — such as 10 years, 20 years, or more. Whole life insurance, sometimes called permanent life insurance, is a life insurance policy that lasts for your “whole” (entire) life.

There are pros and cons to term life insurance and whole life insurance. Term life insurance tends to have the lowest-cost premiums, but it only lasts for a certain amount of time. Whole life insurance tends to be more expensive than term, but it lets you build cash value so you can earn money from your policy, while also protecting your loved ones in case of your death.

But what if there was another way to get some of the best aspects of both of these types of insurance? This other type of life insurance is called universal life insurance. You might not have considered universal life insurance, or maybe haven’t even heard of it. But this type of flexible life insurance policy offers some unique advantages that could make it the right choice for your personal finances.

Let’s see why universal life insurance should be on your radar if you’re shopping for life insurance in 2024.

What is universal life insurance?

Universal life insurance is a type of life insurance that provides coverage for your whole life (as long as you pay your premiums), with flexibility to make changes in the policy depending on your financial goals and family needs. Depending on which universal life insurance policy you choose, you can make adjustments to the amount of death benefit, how much you pay in premiums, and when you pay your premiums.

Like whole life insurance, most universal life insurance offers cash value as part of your policy. This gives you a combination of financial protection for your loved ones in case of your death, and the possibility of investment growth.

How universal life insurance helps your finances

Universal life insurance is not just a life insurance policy; it’s a flexible financial asset that can give you options for your personal finances. While a typical whole life insurance policy pays low interest and has a cash value that grows slowly over time, universal life insurance offers the chance of higher investment earnings. You can invest your universal life insurance policy’s cash value in a few different ways to try to get higher growth of your investments over the course of your life. And universal life insurance tends to cost less than whole life insurance.

With universal life insurance, you can also use your policy’s cash value anytime, for anything you want — often without owing taxes. You can take a loan from your policy’s cash value (while owing interest), or use your policy’s cash value as collateral for a bank loan. Think of universal life insurance as a flexible savings and investment account that also provides life insurance coverage. Depending on your stage of life and financial needs, universal life insurance could be a good addition to your investment portfolio.

Types of universal life insurance

Different life insurance companies might offer a few types of universal life insurance. Here are the most common types, in ascending order of flexibility and most investment options.

Guaranteed universal life insurance

This type of policy is the lowest-cost and simplest form of universal life insurance. With guaranteed universal life insurance, you get fixed premiums, but you won’t get cash value. (Without the cash value, you might want to consider term life insurance instead.)

Indexed universal life insurance

This kind of policy lets you put some of your cash value into an equity index account, which pays interest based on the performance of a market index that it tracks, such as the S&P 500. In case the index takes a loss during the year, you won’t earn any interest. But if your index performs well, your cash value can earn higher interest than you would get from a typical whole life insurance policy.

Variable universal life insurance

If you have a higher tolerance for investment risk, variable universal life insurance could be the best choice. This type of policy lets you invest your cash value in stocks, bonds, and ETFs. You get the potential for bigger investment gains, but you also have to accept the risk of investment loss; if the markets go down, your cash value could suffer losses, too. Variable universal life insurance might also be more expensive than other types of universal life insurance.

Who should choose universal life insurance

Universal life insurance can be a good choice for a few situations. Do any of these feel familiar?

You feel frustrated paying money every month for term life insurance and getting nothing in return, unless you die; it feels like you’re throwing money awayWhole life insurance seems stodgy and expensive; the cash value doesn’t grow enoughYou like the idea of getting additional savings and investment options as part of owning a life insurance policyYou want flexibility to change your life insurance policy’s details, such as a higher death benefit, or paying the premium from the policy’s cash value

Bottom line: You don’t have to be limited to the usual term life versus whole life insurance debate. Universal life insurance can give you additional investment choices and flexibility for getting the most out of your life insurance policy.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Workers who feel forced to work outside office hours register lower productivity scores and higher stress. Find out how to get your work-life balance back this year. 

“It is 6 p.m.,” I think to myself. “I started work at 8 a.m. this morning, but I haven’t finished everything I wanted to do. Maybe I could squeeze in another hour if I skip the gym or order takeout.” Sound familiar? All too often we wind up working a little later or starting a little earlier to try to keep on top of workloads that seem to grow even faster than the cost of living.

The trouble is that working extra hours often makes us unproductive and impacts our personal finances. You might think that working double the amount of time will mean you do double the amount of work. But we aren’t robots. Working extra hours is like trying to squeeze extra flavor out of a tea bag — it gets weaker and weaker the more you try.

Longer hours are not always the answer

According to Slack’s Workforce Index of 10,000 desk workers, almost 4 in 10 wind up working outside of their company’s standard hours. Unfortunately, the survey also shows that those longer hours can often make us less productive and increase the risk of stress and workplace dissatisfaction. Employees who felt they had to work extra hours registered 20% lower productivity scores and were twice as likely to burn out.

Our number one work tip for 2024? Make the most of your work day, then log off and go and do something else. A 35 to 40 hour work week will likely mean you get more done each day and have a better quality of life outside the workplace.

Today’s work-from-anywhere culture makes it easier than ever to blur the line between work and home. For example, many of us check our work emails at night and send work messages from restaurants or other social situations. Not only that, but many work cultures applaud people who put in extra hours.

Don’t get me wrong. Working hard is something to be proud of. And there are times when there’s a crisis or particularly intense period when you might need to do more. But regularly working outside office hours can impact your productivity and put you at risk of burnout. The World Health Organization says that working more than 55 hours a week is a “serious health hazard.”

How to work fewer hours

Speaking from personal experience, overwork can trap you in an ever decreasing circle. Putting in extra hours makes you tired and less productive, which can mean you work even more and become even less productive. If that’s your situation right now, it might be time for a rethink.

Look for ways to improve your focus and productivity rather than slogging away even more. Here are some steps you might take:

Beware of time creep: There’s a concept called Parkinson’s Law, which says that work often expands to fill the time available. Don’t let the day stretch. Instead, make a plan and commit to switching off your computer at a set time. You may find you are able to get more done in less time.Use productivity apps and time trackers: Apps can help you to make lists, follow daily plans, and prioritize your work — all valuable tools when it comes to getting more done in less time.Talk to your boss: If you are having trouble keeping on top of your workload, it may be that you have too much on your plate. Try to provide specific examples of where your time goes and what would make your life easier.

The cost of long days

Financially speaking, there’s a cost to working longer hours. Sure, you may be earning more money, particularly if you’re putting extra hours toward a side hustle. However you may also be spending more. I know that when I’m working long hours, I spend more on transport, takeout dinners, grocery deliveries, and ready meals. For example, an OwlLabs study put the cost of buying lunch from the office at $16 a day, compared with just a couple of dollars for bringing your own.

If you have kids, those extra hours may mean you have to pay more for child care. Plus, healthcare costs related to stress and burnout can also be considerable. Harvard Business Review estimates burnout accounts for between $125 billion and $190 billion in annual U.S. healthcare spending. It is hard to quantify how much long hours cost us — a lot depends on your habits and bank account balance.

To give you another example, we compared the convenience costs of shopping on Instacart versus Target’s pickup service. The same 10 items cost $42.96 on Target’s site and $51.40 on Instacart — that’s a difference of 20% before we even include delivery costs and a tip. Given that the Bureau of Labor Statistics says the average American spends around $475 on food at home, the convenience of using Instacart alone could set you back over $100 a month.

Key takeaway

The idea of working fewer hours and logging off at the end of the day may seem easier said than done. But it is possible. Making that commitment to yourself in 2024 could transform both your work and your personal life. You may even find you can save money along the way.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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Home sales didn’t budge in November. Buyers may be waiting for brighter days ahead. Learn more here. 

Between October and November of 2023, there was no change in the amount of pending home sales in the U.S., according to the National Association of Realtors (NAR).

Home affordability was recently at a near four-decade low, so the lack of change may not seem surprising.

But the lack of home buying coincided with a significant drop in mortgage interest rates. In mid-October, interest rates were near 8% and then tumbled to 7.25% at the end of November.

Buyers, in general, shrugged their shoulders at the change. But why?

Because home prices are still too high and there aren’t enough compelling homes to convince buyers to contact a lender and take out a mortgage.

Why interest rates are down slightly

After more than one year of the Federal Reserve aggressively hiking interest rates, the Fed signaled recently that it may be finished.

The Fed is waiting to analyze the effect of its previous rate hikes before it makes another move. Data from November showed that inflation is cooling, though December’s data indicated that some prices, including housing, rose.

Still, the pause on rate hikes have caused mortgage interest rates to slide lower, offering potential home buyers some relief.

But instead of flooding back into the market in November, buyers continued to mostly sit on the sidelines. And I don’t blame them.

Home buyers aren’t enticed quite yet

Buyers could be waiting for the Fed to cut interest rates. The central bank has indicated that three rate cuts could come later this year.

Waiting on the sidelines seems like a pretty good strategy right now.

Home prices have jumped nearly 28% over the past three years and Redfin predicts they could fall 1% this year. After such a huge jump, there’s no harm in waiting to see if they come back down to earth.

And if the Fed cuts rates, it could go a long way in making housing more affordable again. The monthly payment — including interest, insurance, taxes, and HOA fees — for a $350,000 home with a 7.5% interest rate is $2,528 assuming a 20% down payment.

If that same loan has a 6.5% interest rate, the monthly cost drops to $2,340. And a rate of 5.5% brings the monthly mortgage payment down to $2,159.

When home prices began rising rapidly during the pandemic, it was hard for buyers to find a home. But when interest rates started soaring on top of the astronomical home prices, it completely demolished housing affordability.

More homes and potentially lower rates this year

Patient buyers could end up seeing a much better housing market later this year. If the Fed trims interest rates later in 2024, mortgage rates will likely fall along with them.

And Zillow said recently that homeowners who currently have low-interest mortgages may be more willing to list their homes this year. Some owners who need to move or regret their purchase will realize that ultra-low interest rates aren’t coming back and put their homes up for sale.

So, if you’re waiting to buy a home like me. Being patient just a little while longer could pay off. More homes could reach the market and lower rates might be around the corner. Fingers crossed.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Zillow Group. The Motley Fool has a disclosure policy.

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