How is Your Debt Ratio?
Debt ratio is the amount of monthly debt you have in relationship to your income. This monthly debt includes rent/mortgage, credit card payments, loan payments, and any other regularly paid long-term revolving bills that would appear on a credit report. The appropriate amount of ration is 50%. In other words, no more than 50% of your income should be spent on regular monthly time payments. This 50% does not include food, utilities, and gas, repairs, etc. The remaining 50% is to be used for that. When your debt ratio exceeds 50% of your income, you are treading into dangerous waters indeed and may be reaching a point where your debt is becoming unmanageable.
Eliminate Some Of The Debt
Obviously, you now need to figure out how to eliminate some of this debt in order to get your ratio down to a manageable level. You need a plan. If you are not particularly responsible with your finances, you should not try to develop a plan on your own. You will need professional help. This may come in the form of advice and assistance from a not-for-profit debt counseling service or, in more serious instances, the use of a debt management or debt consolidation firm. Whether you do this yourself or you seek the advice of another, the steps will still be the same.
Obviously, the commitment to eliminate your debt will require self-control. You cannot continue to charge items and to take out new loans when you get one paid off. The concept here is ELIMINATION, not paying off something so that you can incur new debt. How rapidly this process goes depends upon you and how committed you are.
- Determine where your money goes. For one month, write down all of your expenditures, including all of your monthly bills, food, groceries, gas, entertainment, etc. This is the only way you will be able to see where your money is going.
- List all of the regular monthly payments which are revolving. These are charge cards, car payments, personal loans – any debt to which interest is applied and which you pay a specific amount monthly. Don’t include your mortgage or rent in this list, because you don’t want to do anything about that debt at this point.
- Take the minimum payment of each loan/card. Divide the total debt by that minimum payment and you will get a number of months. Make a list with the fewest months’ number being #1 and so on.
- Decide to take the #1 debt and add an amount to that payment that you think you can afford each month. You will make the minimum payment on all of the other debt, but you will increase the amount on debt #1.
- Once debt#1 is paid off, you will take all of the money that you were paying on debt#1 and add it onto the minimum payment you have been making on debt #2.
- Repeat this process until all debt is eliminated.
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