It is surprising how many people cannot tell you how much debt that they owe. I am not talking about a few dollars or even tens or hundreds of dollars. If you have not sat down and calculate your debt them you could be in thousands or even tens of thousands of dollars more debt than you thought you were. It is not difficult particularly if you have a number of credit or store card and a debt faculty attached to you property loan.
Do You Know What Percentage Of Your Income Goes To Pay Your Debts?
One reason you want to calculate your debt is to understand how this key indicator presents your financial situation to the outside world. Here are some ratios that the finance industry looks at for prospective customers.
- 30% or below is considered very good and indicates that your debt load is not a problem.
- 31% to 36% is considered acceptable and indicates that your debt load is serviceable.
- 40% or above is considered a risky and indicates that your debt load could become unserviceable.
The way to find your ratio is to find out the percentage of your income that is used to service debts and related expenses. This would include:
- Credit and store cards payments.
- Property loans, taxes and insurance payments.
- Car loan payments.
- Student loan payments.
- Investment loan payments.
An example would be you monthly net income of $5000 with total monthly debt payments and expenses of $2000. This would put your ratio at 40% indicating that your debt load is too high and that you should try to reduce it. Because it is payment based then working hard to limit credit card purchases and paying them off as soon as possible can put you in a much safer financial position.
Understanding Your Debt
The total amount of debt that you owe, repayment terms and interest rates are something that you should know so that you can look at your financial position and plan your future. It is common for people to accumulate a lot of smaller high interest debts that can put them in a financially precarious position.
When you have put all of this information down on paper then you can easily see where your money is going. This allows you to look at which debts should be paid out as soon as possible because they are putting a strain on your financial position. Here are some basic tips about how to calculate your debt in a simple and straightforward manner.
- Set up a table on some paper or if you prefer set it up in a word processing program so you can print it out making it easier to use.
- Find all of your financial documents. This includes all loan documents, statements and notices sent by financial institutions to you.
- Write down each debt, the total amount owed, the monthly payment and the interest rate being charged.
- Use cancelled checks to double check payments or if you use online banking then check online for payments. It is not unheard of to be paying for something that has already been paid out so it always pays to check.
- Obtain a copy of your credit report. This will list all of your debts and you can check that you have all of your debts listed and that there are no incorrect details on your credit report.
- Total up each column so that you have a total amount owing and the minimum monthly amount that you must pay in your current debt position.
Taking Steps to Ease Your Debt Burden
Now that you know how to judge how your debt load and to calculate your debt you can use these tools to look for ways to reduce your debt level. The ideal situation is to pay off all of your outstanding debt and these tools give you an easy to understand road map on how to do that. The best way to start on this track is find a debt that has the highest interest rate and use any spare cash to pay it off as quickly as possible. Once you have paid it off then you can look for the next highest interest rate and pay that off as quickly as possible. Here are some tips that will help you pay down the debts on your calculate your debt worksheet.
- Limit daily expenses such as coffee soft drinks and snacks by bringing your own.
- Minimize or disconnect services you do not use such as expensive cable or satellite packages.
- Try to eat at home as much as possible it is healthier and cheaper
- Only buy things that you can pay for in cash.
Remember that when you reach your next goal, like paying off a debt or reducing your debt ratio to the next lower level than have a celebration and give yourself a reward. This will reinforce you a doing something positive and make you want to reach the next goal as soon as possible.