| Calculate Debt And Payoff |
| By Credit Federal |
Published
05/16/2008
|
Debt Help
|
|
|
|
|
Calculate If You Have Too Much Debt and Consider Recovery Options
Debt is common, whether yours consists of credit card balances, unpaid mortgage or other outstanding loans such as a student or an auto loan, or perhaps your debt is payday personal loans or in some other form.
Debt isn't bad, but not being able to payoff because you don't have enough money or because you lack a long term repayment plan, that's the bad part.
So how much debt is too much? When your debt nearly equals; or exceeds, your total income. This is called your 'debt to income' ratio.
How to calculate debt to income ratio: Add up your total monthly expenses, then divide that sum by your total monthly income. The value equals your debt to income percentage (ratio).
For example: If your monthly bills total $2,000 and you earn $3,000 per month, your debt to income ratio is .6666 (66.66%). This means 66.66% of your income is used to pay bills.
Now that you've calculated debt to income, here's where you stand:
If your debt ratio is below 36%, you're doing good. A ratio lower than 30% is excellent, but a ratio over 40% could be long term financial disaster. But don't fret just yet. Recalculate your debt to income ratio, but this time leave out expenses which are not necessary and which you can immediately cancel (such as cable, memberships, hobbies, etc). If your debt to income ratio is still high, you need to take measures to protect your long term financial future. Cut back on wasteful spending, and payoff debt that is eating up your budget, such as debt with high interest like credit cards.
Debt Repayment Plan
Want an easy way to track expenses? Use our free personal finance software. It's as simple to use as a checkbook register.
If you determine you have too much debt, put together a plan to payoff or lower the balance. This will protect your future as well as help improve credit scores.
TIP: The greatest tip is to be patient and to not become discouraged. As you apply money; even nickels and dimes, towards your debt, although the repayment/payoff seems slow you will over time make a dent in your debt. Stick with your debt repayment plan. If you work hard you will be amazed at your accomplishments and you will discover ways to get extra money to further payoff debt.
1. Make a list of all your debt. Include minimum monthly payment amounts and interest rates, as well as the oustanding balance.
2. Prioritize your debts in the order you want to pay them off. Some credit counselors recommend first paying off the smallest, since this can encourage you to keep going. Others recommend first paying off debts with the highest interest rates, since this will save you the most money.
3. Determine how much extra money you have each month for paying off debt. You may need to reduce spending on nonessentials so you'll have the money to divert to your debt repayment plan. Even if you have to take a part time job, have a yard sale of unwanted items, use your tax refund or work extra hours, find as much money as you can before considering a debt loan. The reason a debt loan isn't recommended, is because such a loan isn't likely to stop you from your current spending habits, and you'll just end up with more debt than you already have.
4. Pay all the extra money on the first debt on your list, while paying the minimum on all other payments. Once you have paid it off move to next debt on your list, paying the extra plus the current minimum payment. Continue to do this until you have crossed all the items off of your list.
5. Don't go back to your wasteful spending habits. Instead, put most of the extra money you now have into savings. Soon your money will begin to work for you.
If you feel you need another option because your debt is too great, here are some ideas:
- Get a second opinion. As they say, two heads are better than one. Consider a credit counseling or debt management agency. They may be able to help you better organize a debt repayment plan and to help you cut wasteful spending.
- Get a loan. If you have a home or an auto with equity, you can obtain a cash personal loan, unsecured debt consolidation loan or other type of equity (collateral) loan.
- Negotiate a debt settlement. If your debt far exceeds income, and interest is mounting quicker than you can put a dent in the principal, you may want to consider a partial chargeoff. Contact your creditors and ask what they would take as a settlement. See our free debt settlement tips for more information.
|
Related Articles
Email this article to a friend - click here
Webmasters: Free Credit Content for Your Website!
Multiple ways to use our financial content:
*) You can use our RSS Feeds for automatic insertion and updates
*) You can simply link to this article
