Being in debt is not bad but being deep in dept is not good at all. If you want to avoid financial problems you should assess how healthy is your debt situation. Before you accumulate more debt you should be able to figure out how much debt you can afford.
All you have to do is to calculate your Debt-To-Income (DTI) ratio. This is what your lenders calculate when you need a mortgage or a car loan. To calculate the Debt-To-Income ration all you need is your monthly income and how much you spend each month on debt.
DTI = monthly debt/ monthly income X 100
To determine how much you spend on debt each month you have to add up all your debt sources:
- Mortgage or rent
- Car loans
- Credit card payments
- Student loans
- Alimony/child support payments
- Other loans
This will give you the total amount you spend each month on debt.
Next calculate your monthly income. In order to do that you will calculate your yearly income and divide it by 12.
- Gross income
- Commission
- Bonuses
- Alimony/child support
- Other income
Once you have your monthly debt and monthly income calculated you can calculate the Debt-To-Income ratio.
Example:
Mortgage - $1130
Car loan - $325
Credit card payments - $275
Total monthly debt payment - $1730
Annual gross income - $49,000
Annual commission - $4,500
Total monthly income - $53,500/12 = $4458
The Debt-To-Income ration will be:
DTI = $1730 / $4458 X 100 = 38.8 %
To determine how healthy your debt load is, here are the categories:
36% or less is the healthiest;
37%-42% is healthy but you should start to reduce your debt;
43%-49% you could have financial problems;
50% or more means that you are deep in debt and you might need help with debt problems;
Before you accumulate more debt, calculate your Debt-To-Income ratio to keep your debt load under control.
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