With new homes selling for an average of $453,700 and new cars costing an average of $47,077, few of us have the resources to pay cash for the things we buy.
The result: We all carry a debt load. What is you debt load? Simply put, your debt load is the total amount of money you owe to your various lenders.
How Can You Determine Your Debt Load?
There are two basic ways to determine your debt load: calculate your debt/income ratio or calculate your net worth.
Calculating Your Debt/Income Ratio
To calculate your debt/income ratio, do the following:
- List and add up all your monthly payments, making sure to include figures for any bills you pay quarterly, semi-annually or annually.
- Divide your gross annual income by 12 to get your gross monthly income.
- Divide your total monthly payments by your total monthly income.
- To convert the result into a percentage, and therefore a ratio, move the decimal point to the right by two digits.
If you arrive at a ratio of between 10:100 and 20:100, congratulations! You are financially healthy. However, if your ratio is higher than 20:100, you may be headed toward financial difficulties.
Calculating Your Net Worth
To calculate your net worth, do the following:
- List and add up the value of all your assets (everything you own), even if you still owe balances on some of them.
- List and add up your liabilities (everything you owe).
- Subtract your liabilities from your assets to arrive at your net worth.
Again, your net worth figure by itself doesn’t tell the whole story of your financial health. You need a ratio for this. Many financial experts recommend that this ratio change as you age. For instance, at age 30, they recommend that you have a net worth two times your annual gross income. By age 55, however, it should be 20 times your annual income.
How Can You Effectively Manage Your Debt Load?
Now that you know how to calculate your debt load, the question becomes: How can you effectively manage it so as to achieve your overall financial goals? The answer: make a plan and stick to it.
Most people use one of two methods to do this: the debt snowball method or the debt avalanche method.
Debt Snowball Method
This method consists of paying off your smaller loans in full before attempting to pay off your larger ones. In other words, you may wish to make minimum payments on your larger loans, but pay considerably more than minimum on your smaller loans. This allows you to see immediate and continuing debt reduction progress, giving you a snowball effect to your payments.
Debt Avalanche Method
This method relies on the various interest rates you pay on your loans, and consists of making higher than minimum payments on those with the highest interest rates. Like an avalanche, this method will send money pouring down on your highest interest rate. Once it’s fully paid off, you then avalanche your next-highest interest debt, and so on and so forth.
Where Can You Find Help?
If you would like to receive expert help in managing your debt load, call AmeriEstate Legal Plan, Inc. at (800) 235-0963. Since our founding in 1998, we have helped over 40,000 families nationwide achieve their financial and estate planning goals.