If you carry debt, you’ve likely heard or run across the term “debt load,” which is simply the total amount you owe. Fully understanding the terms means figuring out whether your debt load exceeds what you can comfortably repay. Keep reading for more about the term, and what to do if your debt load is more than you can handle.
Is My Debt Load Too Much?
To determine this, you’ll need to compare how much you owe to how much you earn so that you can calculate your debt-to-income ratio.
The first step in determining whether your personal debt load is more than you can handle is to add up your monthly payments. If you have no fixed monthly payments, make an estimate of 4 percent of your total balance.
Then, calculate your monthly income by dividing your gross yearly wages by 12. After that, divide your total monthly payments by your monthly income. To arrive at your debt-to-income (DTI) ratio, place the decimal point two numerals to the right.
If you have a DTI of no more than 10 percent, you’re good to go, in terms of your finances. A ratio between 10 and 20 percent means you have “good” credit. However, if your DTI is 20 percent or more, you should take a hard look at your debt load. Otherwise, lenders may deem you too risky to give you a loan, and even if it does, you’ll likely get a much higher rate.
Is There Another Way to Measure My Financial Health?
Yes. You can do so by determining your net worth, which is the overall value of your finances. The value of your assets minus your obligations equals your net worth.
Your assets, by the way, include everything you own that’s worth money. In addition to your house, this means your vehicle, furniture, jewelry, etc. Your liabilities are the sum of all that you owe, including student loans, credit cards, loans from relatives and friends, mortgage or rent, etc.
If your debt load has become too much, then you must take remedial action. Two popular methods of reducing your debt load are called Snowball and Avalanche.
The Snowball method calls for you to throw everything you can at your smallest debt, while making minimum payments on your other accounts. Then you’ll proceed to the next smallest debt until all your obligations are erased. This method works best for those who need the psychological boost of an early accomplishment to keep going.
With the Avalanche method, you’ll attack the debt that carries the highest interest rate, while making minimum payments on your other debts. After you’ve paid that first debt off, go after the account with the next-highest rate, then rinse and repeat until you are debt free. This method allows you to get rid of debt faster while lowering your overall interest rates.
If your liabilities are edging out your assets, though, and your situation has become untenable, those do-it-your-self methods may be insufficient. In that case, you may want to get help from professionals. We suggest you consider debt solutions from Achieve.
If you understand the term debt load, and what it means for your personal finances, you can head off financial trouble before it becomes unmanageable and wreaks havoc on your life. Develop prudent, disciplined spending habits now, while putting money aside for a solid emergency fund. Also, if you must use your credit cards, only charge what you can pay off in full.
Remember, though, that if you’re already in over your head, we recommend that you seek relief through Achieve.