Understanding Debt Load

The sum of all the money you owe is what’s commonly known as your debt load. To determine whether your load is more than you can afford, you’ll want to calculate your debt/income ratio or “debt to income” ratio by comparing the amount you owe to the amount you earn. 

Follow these four simple steps:

1. Calculate all your monthly debt payments. If you don't have fixed monthly payments, one way is to estimate your monthly payments as 4 percent of the total amount you owe.
2. Take your gross annual wages (total amount you make per year before taxes and other deductions come out) and divide them by 12 — that's your monthly income. 
3. Take your monthly debt payments total and divide it by your monthly income. 
4. Move the decimal point two digits to the right to make it a percentage — that's your debt/income ratio.

A debt/income ratio of 10 percent or less means that your finances are exceptionally healthy, and ratios within a range of 10 to 20 percent represent what many would call good credit. At 20 percent or above, it’s time to assess your debt load. It will be more difficult to save, and creditors will be less likely to give a loan to someone with such a high debt/income. Creditors that do tend to charge higher interest rates.

An additional factor in helping gauge your financial health is to calculate your net worth, which is the total value of your personal finances. 

• Assets – Everything that you own, which may include your house, vehicle, furniture — anything that’s worth money.  
• Liabilities – Everything that you owe, which may include your mortgage, credit card balance, interest, student loans and loans from family and friends and any other kind of loans.
  

• Debt Snowball Method – This method of paying off loans works by prioritizing debts based on their size. By paying off smaller loans first, you’ll be able to pay off several loans earlier on, and your payments ‘snowball’ as you’re psychologically rewarded. Many people feel more motivated to pay off loans if they can see visible progress.
  

• Debt Avalanche Method – Paying off debt through the debt avalanche method means first making the minimum payment on each debt, then using any remaining money to start paying off the debt that has the highest interest rate. Once you’ve paid off your highest interest rate debt, tackle the debt with the next highest interest. Using this method can result in paying off debt more quickly while reducing overall interest rates.