|
Ask WomensFinance? : Answer |
Q: How much debt is too much?
A: Calculating a personal
debt-income ratio is one of the most accurate ways to see if you've accumulated too much
debt. Follow the example below to see how well you're doing.
Creditor* |
Payment |
Interest |
| 1. |
|
|
| 2. |
|
|
| 3. |
|
|
| 4. |
Total_______ |
Total_______ |
| *Don't include mortgage or
rent. |
Total the last two
columns. The third column's dollar amount might be a wake-up call as to how much you're
really paying in interest charges to creditors each month.
Take the total from column two and we'll use it to determine if your debt level is too
high. Plug it into the following equation to find the proper debt-to-income ratio:
Total Payments
----------------- = Debt-Income Ratio
After-Tax
Income
For example, if your monthly payments total $275 and your take home pay is $1900, your
debt-to-income ratio would be 14%, healthy by any standards. Generally, you want to
maintain a low debt-to-income ratio.
Less than 15%
Your debt situation is fine and you're managing money well.
Between 15% and 20%
You're headed for trouble. Consider seeking help and take steps to prevent debts from
accumulating.
Between 25% and 35%
You're in trouble. Seek help.
Over 35%
You may be headed for bankruptcy.
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