How much do you owe in debt? Seriously, take an honest look at your finances. Do you have more money going out than coming in? Are you making the national deficit not look so bad in comparison? If you’ve answered yes to these questions, don’t worry, because you have the opportunity to take action now before your grandkids are stuck with paying for your bad decisions.
The Math Behind the Numbers
Finances are easy. They are basic math equations that give you an idea of how money is flowing. At the end of your calculations, positive numbers are welcome and negative numbers are, well, not so welcome.
Start by determining liabilities. Liabilities are all the little parasites that leach off your money. Student loans, credit card debt, rent, utilities and anything else that takes up room on your budget as an expense is considered a liability and will be working against your income. Add these expenses up to get a final number.
Now look to your salary and any additional incoming money — don’t forget bonuses, investments and any extra income from side businesses. Add these up and you will have a figure representing your total assets.
Once you have determined your total assets and liabilities, you want to calculate your net worth. Net worth is simply your assets minus liabilities. Now, taking these two numbers, total liabilities (your debt) and total assets (your income), you can calculate your debt-to-income ratio. This sounds complicated, but it really is quite simple. To figure out this ratio, simply divide your debt by your income.
What It Means
You slugged through a tough round with your debt. You wept over your paltry income. Now, after some diligent calculation work, you’ve got your debt-to-income ratio in front of you. What does it mean? Simply this: Your debt-to-income ratio is how much of your income goes towards paying your debt. In the best-case scenario you will have a relatively low number for this ratio.
Who Looks at It
When lenders and creditors look at your debt-to-income ratio, it says a few things to them. First of all, it tells them how much money you spend on debt. If the number is low, lenders and creditors are going to be fairly comfortable lending money or credit for you to invest in additional assets. If the number is high, however, they will likely get nervous and start to shy away from you as a prospective loan or credit client. And really, the last thing you want is for a lender or creditor to be shy around you.
What You Can Do From Here
Now that you are armed with the knowledge of how to calculate your debt as well as your debt-to-income ratio, you should take the time to review your net worth and make the changes necessary to assure your financial stability and prosperity. Establish a solid financial plan to not only reduce your debt, but also to grow your income.