Americans are no strangers to debt. As of the third quarter of 2024, the average consumer owed $105,056, according to Experian [1]. That figure accounts for mortgage balances, home equity lines of credit, student loans, auto loans, credit cards and personal loans.
But it’s easy enough to reach a point when debt becomes problematic. And that’s what prompted Emery from Georgia to call into The Ramsey Show and ask for advice [2].
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Emery and her husband are in their late 30s with three young kids and they’re looking to shed debt. Cohosts George Kamel and John Delony had some sage advice for the couple, and they seemed eager to embrace it after having learned their lesson: there is such a thing as too much debt — even when it’s being used to help generate income.
The problem with too much business debt
Emery and her husband didn’t rack up debt by overspending on cars and vacations. They took on a lot of debt in the course of financing two rental properties and starting a business. But the couple is now saddled with debt and wants out.
Kamel strongly agreed that they need to break the cycle.
"You guys are stuck in a broke-person mindset of how much down, how much per month," he said. “How much down? How much per month? Can I afford the payment?”
“You’re also stuck in social media entrepreneur hell,” Delony added.
Emery and her husband own two rental properties in Nashville worth about $310,000 to $320,000 each. But they also owe about $170,000 on each one’s mortgage. They also have:
- $24,000 in credit card debt from renovating one of their rentals
- $31,000 in auto loan debt
- $260,000 in business debt
- $292,000 in primary mortgage debt
The couple plans to sell their two rental properties and expects to walk away with about $200,000, after accounting for their mortgage balances and capital gains. Meanwhile, their land-clearing business grossed $330,000 last year.
Kamel advised them to use the $200,000 to get rid of their remaining consumer and business debt using the snowball method. He said if they take that money plus $10,000 per month from business earnings, they could be debt-free within a year, other than their personal mortgage.
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
How to pay off debt
Kamel recommended the debt snowball method to Emery, where debts are paid off in order of smallest balance to highest. The upside of this method is that people may see meaningful results sooner, allowing them to stay motivated.
Experian, however, says that if the goal is to save money, it’s best to use the avalanche method, where you pay off your debts in order of highest interest rate to lowest. In this specific situation, the two methods may end up being one and the same.
Typically, credit card interest rates are higher than auto loan rates. The couple’s auto loan rate may or may not be higher than the interest rate on their business loans. Either way, Emery and her husband should pay off their credit card balance first, since it’s the smallest and likely the costliest. If they listen to Kamel, they’ll pay off their car next, followed by the business loans.
Be careful when taking on debt for a business
It’s easy to see how Emery and her husband ended up in their situation. They thought they were taking on debt strategically to set themselves up with multiple income streams. But in the end, the debt got away from them.
It’s important to remember, as Delony pointed out, that sometimes business profits can ebb and flow. But no matter how well or poorly a business is doing, the debt is still there.
It happened to be that, last year, Emery and her husband’s business grossed $330,000. But next year, they could end up grossing half that amount or less. They’ll still have debt payments to think about and, overall, liability hanging over their heads.
If you’re thinking of starting a business (or, like the couple here, multiple businesses), it’s important to do your research to see how much income you’re likely to net each year. Then, it’s important to make sure you’re not taking on too much debt relative to your projected income.
Huddle Business Capital says that a debt-to-income ratio of 35% for a business is generally considered healthy, while a ratio of 36% to 50% is reasonable but less optimal. A ratio of 50% indicates that a business may have more debt than you can handle. And a company with a ratio above 50% means you might struggle to borrow when the business needs it [3].
If your business is netting $20,000 a month and you owe $5,000 a month in debt payments, your debt-to-income is 25%, which should be a manageable level to keep up with. But, if your business is netting $20,000 per month and you owe $10,000 in monthly debt payments, you’re at 50% and operating could get more challenging.
Also remember that until you’ve been in business for a number of years, you may not know what monthly income to expect on a recurring basis. Your best bet when first starting out is to take on as little debt as possible and be conservative with your income projections to avoid getting in over your head.
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[1]. Experian. “Experian Study: Average U.S. Consumer Debt and Statistics”
[2]. The Ramsey Show. "You’re Stuck In A Broke-Person Mindset”
[3]. Huddle Business Capital. “Business Debt-To-Income Ratio”
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