Money Management: Using More Than Needed
One of the main causes of debt is over spending which leads people to spend more money than they make. Being aware of your money management habits and trying to reduce them will give you more financial freedom and can end up saving you lots of money.
Living within your means is possible and will lead to a more satisfying financial situation.
Debt-to-income ratio is pretty much one way lenders can measure your money management ability to make monthly payments toward to the total borrowed amount.
First off, you need to know how to calculate your debt-to-income ratio. In order to do this you’ll need to add up all of your monthly debt payments and then divide them by your monthly income (gross).
Your “gross” monthly income is basically the amount of money you have earned before the taxman rolls through and deductions are taken out.
It’s really quite simple actually, the higher the debt-to-income ratio, the harder it is for the person to make the monthly payments. First and foremost you must recognize if you’re in over your head. Knowing when you’re not in great shape regarding your ability to make the monthly payments if key to coming to terms with your debt.
It’s a simple truth; you only can earn so much every month, so it shouldn’t come as a surprise that your monthly payments are more than you bargained for. It all comes down to percentages.
Paying Off Your Debts
Usually, lenders will tell you that the ideal “front-end” ratio should be no more than 28 percent—36 percent or less for “back-end” ratio. These numbers are suggestions designed to keep your debt in check. The problem is, you might be well past the point of empty suggestions from a calculator, understandably.
You can figure out your debt-to-income risk by acknowledging which “tier” you fall under. Tier 1 pertains to the people who are contributing 15 percent of their income to pay off their debts. At 15 percent, you can still be comfortable in paying for necessitates such as food, housing, and transportation.
At a 15 percent debt-to-income ratio, you are still in a stable state—though you do need to be mindful of the chances of unexpected costs that may or may not pop up. Fortunately at a 15 percent ratio, you are still fairly covered in the event of an emergency, even if you needed to take on a new debt of some kind.
The second tier includes those that are attributing 15 to 20 percent of their income for debt payments. So, this is where things can start to get hairy. It isn’t time to start getting too upset just yet, but the comfort level is decreasing for sure.
Let’s just say for arguments sake that you make $35,000 a year. If your debt-to-income ratio is 20%, that means your monthly debt payment will be $583.40. At this ratio, it is usually possible for people to keep a level status, but the belt is certainly tighter.
Self-debt help and money management can be a slippery slope. In order to keep the status quo while at a 20% ratio, it would most likely be best for one to adopt a self-payment method such as the debt ladder or debt snowball. It comes down to grit at this point. Can the individual retain the self-discipline necessary to keep their head above water?
The third tier is when the danger sets in. For the same figure of $35,000, a 25 percent debt-to-income ratio would mean that you’d be paying monthly debt payments equaling to about $729.25. Now it is time for panic mode. Obviously something is very out of whack if you have way more debt than you can actually afford when you consider all of your other expenses.
At this point in the game it might be best to consider some alternative debt relief programs. By doing so, you are ultimately being proactive in your money management effort. Debt can be incredibly frustrating to manage on your own, which is why we recommend a service that is right for you.