America seems to run on consumer borrowing and spending. We are a product-based economy, and many products are financed, not purchased outright, from retail outlets. Things like homes and cars may be necessary items to finance, but the scope of the American credit reach can be problematic. Knowing limits and adhering to them is essential to financial health.
Instructions
1. Review your finances carefully. Collect the following: all financial statements (especially if you own a business), copies of all loan statements, pay stubs, W2s and prior year tax returns. Pull a copy of your credit report (see Resources section) and determine your total debt load, how much you spend on monthly bills and your credit score.
2. Determine your financial goals. Make a three-, four- or five-year plan to help reduce the stress of living month-to-month.
3. Divide your monthly debt payments by your monthly income to calculate , which compares the amount of income you are bringing in to the amount you are paying each month in debt. (For example, if you're paid $4,000 per month, after taxes, and have a total of $1,800 in monthly expenses, your debt-to-income ratio is 0.45 or 45 percent. In general, a ratio of 36 percent or less is considered good.)
4. Stop borrowing if your debt-to-income ratio is higher than 30 percent. Review your statements and determine which expenses can be cut. Use only a debit card and create a weekly and monthly budget that works toward paying down debt, rather than incurring further debt.
5. Begin paying off debt if you are over the 30 percent threshold. Focus on one account at a time, making extra payments against it to pay it down quickly. Incorporate extra funds into your monthly budget to allow for this extra payment on your loan. Create incentives for yourself (small purchases or gifts) that will motivate you to adhere to the budget.
Tags: debt-to-income ratio, your debt-to-income, your debt-to-income ratio, your monthly, monthly budget, ratio percent