Frequently Asked Questions on Getting Out of Debt
Written by Gloria Zhu   


How much debt is too much debt?

Having debt is normal—this might come in the form of a mortgage, loan or credit card balance. Debt is not an issue until you cannot pay it off. It’s having too much debt that can cause an unhealthy financial life. Take the time to determine whether or not you have too much debt by looking over your budget.

One of the best ways to calculate your debt load is by figuring out your debt-to-income ratio which you will find out below.

What is a Debt Income Ratio?

A way to calculate your debt is to calculate your debt to income ratio. This is based upon your income and debt levels, two major components that help you track how you are doing financially. Ideally, you would like to have more income coming in than debt payments going out.
Although you cannot completely depend on financial rations to give you a detailed picture of your financial situation, they can be used as a quick snapshot of how you are doing.

You can calculate your Debt Income Ratio by adding all of your debt and subtracting it from your income.

Step 1: Gather all of your monthly debt obligations and add them. This will include monthly payments such as:
  • Mortgage payment (including taxes, insurance, private mortgage insurance, etc.)
  • Car payment
  • Minimum credit card payment
  • Student loans payment
  • Child support
  • Any other monthly debt obligations
Step 2: Calculate your monthly income. Start with your monthly salary. If you receive any additional bonuses on a yearly or quarterly basis, be sure to divide it out to get the per month number. Finally, add up any additional income you receive, whether through dividends, a side business, or whatever the case may be. Total these all up and you will have your total monthly income.

Step 3: Take your total debt payment number and divide it by your total monthly income. That equals your debt to income ratio. For example, if you came up with a $2,000 total debt payment number and monthly income of $6,000, that leaves you with a debt to income ratio of 33%.

Ultimately, not only is this useful for yourself, but many lenders use this ration to determine whether or not to extend financing if you’re requesting a loan. Knowing your ratio will not only help you save time, but it will help you be more prepared when it com



 
Last Updated on Friday, 24 December 2010 06:31