Learn how to calculate your debt ratio and avoid over-indebtedness

If you know your debt ratio, you can reduce your risk of excessive debt and enjoy all the advantages of your loan.

The debt ratio is to some extent an indication of your actual capacity to borrow.

It is necessary to know how to calculate one’s debt ratio to better manage one’s budget and to monitor the state of one’s finances. You can then, depending on your income and your finances, know how much you can borrow again without being burdened.

The debt ratio is expressed as a percentage. How does one interpret the obtained result?
Know that the ideal amount of your total monthly payments should not exceed one third of your income. This allows you to have a sufficient safety margin in case of unexpected expenses.

How to calculate your debt ratio?

It is indispensable to make a rigorous calculation to arrive at a reliable result proportional to your revenue. Do not forget to consider all necessary elements.

- Find the amount of your total resources: include your total net pay and benefits if you have any other gainful activity. Add this amount to social allowances and other forms of aid. Pensions, annuities and rent must be taken into account.

- Next, evaluate your expenses: add up your fixed expenses, such as rent, miscellaneous expenses and any other costs, not forgetting the monthly payments on all your outstanding loans.

All that is left to do now is to divide your total spending by the sum of your income to get your debt rate.

Here is an example to facilitate the calculation. If you earn 1500 GBP each month and your expenses amount to 150 GBP, your debt ratio is 10%. You can then take out a loan for the remaining 23% before reaching the maximum advised at 33%. If you decide to engage in a loan, the recommended maximum amount for monthly payments would be 345 GBP.

This calculation is not difficult; it just requires an effort to guarantee precision. If you would like to proceed to calculate your debt ratio, your doubts concerning the risk of debt will vanish.

Francesco Romanello

Par , le Tuesday 5 February 2013

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