CTC tips: calculating debt

Calculating Debt

According to Nerd Wallet, the national average credit card debt is $15,607; the average mortgage debt is $153,500; and the average student loan debt is $32,656. Even if your debt isn’t as high as these averages, it can still wreak havoc on your finances.

Perhaps your debt payments are affordable. However, that doesn’t mean you’re in a financially healthy situation. Calculating your debt-to-income ratio (DTIR) can help you determine if you’re taking on too much debt. Your debt-to-income ratio is the percentage of your gross income that is tied up in debt. To calculate it, divide your monthly debt payments (mortgage/rent, student loan, credit card bills, etc.) by your monthly gross income and multiply it by 100 to get your DTIR as a percentage. So, if your monthly debt payment is $1,500 and your monthly gross income is $3,000, your debt-to-income ratio is 50% ($1,500/$3,000 x 100 = 50). Generally, anything over 36% is considered risky: a high DTIR will impair your ability to save and make it difficult to recover from a financial emergency.

Regardless of whether or not your DTIR is above 36%, total freedom from debt should be a financial goal. To start, make a list of all of your debt: their balances, interest rates, monthly payments, and due dates. Calculate how long it will take you to pay off your debts, and how much you will have paid in interest (you can find helpful calculators like this one online). Also note your annual and monthly income.

Making this list might seem like a small act, but it’s important to fully grasp the totality of your debt. Your debt can seem much more affordable when you’re only looking at your monthly payments; seeing the total numbers, especially compared to your annual and monthly income, can help you realize how big of a problem your debt is.

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