Understanding the ideal and healthy amount of debt is crucial for maintaining your financial well-being and ensuring your wallet stays intact. In our daily lives, we face various needs and expenses that must be met, from essential bills to unexpected emergencies.

In this context, many people resort to loans or installment plans as practical solutions to meet these pressing financial demands. While borrowing can provide immediate relief, it’s important to recognize the significance of managing it wisely.

Achieving a balance between meeting current needs and maintaining sustainable financial health is essential to avoid overwhelming debt that can strain your resources and affect your quality of life. By educating ourselves about responsible borrowing, we can fulfill financial obligations without compromising long-term stability.

Debt and Installments in Financial Management

Having debt and using installment plans is not inherently wrong or taboo; in fact, it is a common aspect of effective financial management. Many people find themselves in situations where borrowing is a necessary step to achieve their goals.

In general, debt can be categorized into two types: productive debt and consumptive debt. Productive debt refers to loans intended to generate income or increase wealth over time, such as loans to buy a home, invest in a business, or acquire rental property. 

On the other hand, consumptive debt is associated with immediate consumption, like credit card debt for everyday purchases or vacations.

There are certain significant expenses that are often unaffordable to pay in cash upfront, as saving for these large purchases can take a long time. For example, buying a house or a personal vehicle typically involves substantial costs that most people cannot save for quickly.

Additionally, entrepreneurs may need to borrow funds for working capital to invest in inventory or equipment, which can yield profits in the future. 

By understanding the various types of debt and their potential benefits, individuals can make informed decisions aligned with their financial goals while responsibly managing their overall financial health.

Read: 6 Ways to Get Free Scholarships to Study at Home and Abroad

What is the Ideal Amount of Debt?

While borrowing and using installment plans is common, it’s essential to ensure that these financial commitments do not become excessive or burdensome. Over-indebtedness can lead to significant stress and limit your ability to meet other important needs and expenses in your life.

Ideally, the amount of debt you carry should not exceed 30-35% of your monthly income. Exceeding this threshold can create a precarious financial situation, making it difficult to manage daily living costs or save for future goals.

Conversely, keeping your debt level below this range is even more advantageous, as it allows for greater financial flexibility and peace of mind.

By adhering to these guidelines, you can maintain control over your finances and ensure that you can meet current obligations and future aspirations without being burdened by excessive debt.

Here is an illustrative table for calculating the maximum ideal installment amount based on monthly income:

For example, if your salary is IDR 4,000,000 and your debt installment is Rp 2,000,000, that’s already 50% of your salary, not including other living expenses. Such an installment is unhealthy.

Read: Simulation and Easy Way to Calculate Loan Interest

Live Within Your Means and Borrow Within Your Capacity

Knowing the ideal amount of debt helps you manage how much debt and installments you take on without disrupting your personal cash flow.

Be careful not to accumulate excessive debt and installments just to meet a lifestyle that leaves you constantly anxious and at risk of default.

If you find it necessary to take on large debt and installments, try to seek additional sources of income beyond your salary.

The more income sources you have, the easier it will be to pay off debt and installments without compromising your budget for living expenses.

If you’ve committed to having debt and installments, make sure to always pay on time and settle various bills by their due dates. 

Avoid late payments, as this can lead you to "dig a hole to fill a hole" by seeking new loans to pay off old debts.

Download the neobank on  PlayStore and App Store  and apply for a loan wisely at Neo Loan.

For complete information and terms & conditions regarding Neo Loan, visit the link https://s.id/webneoloan & if you want to apply for Neo Pinjam, click the link https://s.id/neoloan

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PT Bank Neo Commerce Tbk is licensed and supervised by the Indonesia Financial Service Authority (OJK) and Bank Indonesia (BI), and an insured member of Deposit Insurance Corporation (LPS).