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Living with debts is no accomplishment, yet getting over it wisely in a legitimate way is nothing less than one. Planning and executing the personal debt management plan are two entirely different concepts. Many people feel well-planned finances could help them get out of debt, whereas the fact of the matter is that you need to take a lot more actions to get out of debt which starts with a proper assessment of the entire financial situation. Even with the best efforts, people do not reach their goals of overcoming their debts as they confess that they were not aware how massive their arrears were.
Although getting a debt management plan is one of the best ideas to resolve your debt issues, there are a couple of things you should know before you apply to avail the suitable debt help solution. And the first and the foremost step by which you can assess if you have debts which you cannot handle on your own, is by checking your debt-to-income ratio. There are different types of finance ratios that assist in measuring your debt risk, and the debt-to-income ratio is one of the most commonly used ones. With the results of the debt to income ratio, you can easily conclude if you need to avail debt help solution or if you manage your finances by yourself.
Evident from the name, the debt to income ratio indicates how much of your monthly income is getting consumed by the debt repayment process.
Simply put, the formula to calculate this ratio is –
• Debt to Income ratio = Total amount spent to repay debts/Total monthly income.
While calculating your income levels, you need to make sure that you include all the possible income sources like your paycheck, pension income, etc., and while calculating your debt levels, you need to include all your repayments like bank loans, unsecured loans, credit card payments, and all other debt repayments.
Put short together, the 3 simple steps to know if you are having debts that are more than what you can handle are –
1. Take count of your total monthly income
2. Take count of total debt repayment amount
3. Run the formula to get the ratio levels.
Once you have the results of your debt to income ratio, you can assess if you can repay your debts affordably or not. Here is a quick glance of what the ratio can talk about your debt repayment capabilities.
• 30% or less - Having a debt to income ratio of 30% or less than that indicates you are on the 'OK' side. It shows that your debts are not eating away a considerable amount of your income, and you have enough funds left after you repay your monthly debts. Experts suggest that if you have this amount of the debt to income ratio, you can follow your budget strictly and get into better financial shape soon.
• 31 – 42% - This is the maximum acceptable range of debt that one can usually handle. If you are having too many debts of varying interest rates, it makes sense to pay off the debts that have a relatively higher interest rate as these rates will be accumulating leading to an increase in the total repayment amount. So, by repaying maximum debts when you can afford it, especially the higher interest rates ones will help you get out of debt earlier.
• 43 – 49% - Having a debt ratio in this range calls for some real concern. A small alteration in your income levels or an increase in the interest rates could put you in real trouble. Also, with this ratio, you might not be able to make any extra repayments or increase your payments as you might fall short of your income to take care of other expenses.
• 50% or more - You are definitely in the danger zone. When 50% or more than 50% of your income is going towards debt repayments, it means you are in grave financial crisis, probably in a state where you cannot handle your issues all by yourself. With this debt to income ratio, you could probably apply to avail a suitable debt management plan with which you can reduce your debts and repay affordable amounts.
So, if you are having debt issues and are not in a place to repay them on time, you can seek a debt management plan with which your debts can be written off and you can make affordable repayments to the creditors.