Quiz
How many of these statements sound like you?
- There’s never any money left over at the end of the month.
- I don’t have a budget.
- I am not sure how much I spend on basic items like food or clothing.
- I don’t have nearly enough money in savings.
- I charge more on my credit cards than I pay off each month.
- My spouse and I fight about money all the time.
- I delay or avoid paying bills because there’s no money.
- I worry about money constantly.
- If I could just hit the lottery, all my problems would be solved.
- I don’t know how everybody else does it.
If four or more of these statements ring true, then your spending habits need some serious scrutiny.
The Bottom Line
The first step is to take a look at your debt as a whole; complete the debt table. This worksheet will help you put together a list of all the money you owe, and is your best starting point for all the calculations and strategies that follow. Put down everything, no matter how small. For credit cards, put down the outstanding balance, not the amount you pay off each month. Then use your totals in the ratios that follow.
Calculating Your Consumer Debt Ratio
Next, calculate your consumer debt ratio. For this calculation do not include your mortgage, rent or home equity payment or credit card expenditures that you pay in full, but do include all other money you have borrowed: car and truck loans, credit card balances, personal loans, school loans, and installment debt.
Monthly debt payments / Take-home pay = Consumer Debt Ratio
Here’s how to calculate it:
| Car/vehicle payment |
$300 |
| Credit cards |
$100 |
| Student loan |
$200 |
| Other loans |
0 |
| a) Total consumer debt payments |
$600 |
| b) Monthly take-home pay |
$2,500 |
| Consumer Debt Ratio = |
| a) divided by b) |
24% |
Interest rates on consumer debt can be hazardous to your financial health. If you have $10,000 of credit card debt at 18%, and you are paying it off at the rate of $200 per month (and not adding to it), it will take you almost 8 years to pay it off. If the rate is only 10%, it will still take you about 5 1/2 years.
Calculating Your Total Debt Ratio
Next, look at your total debt ratio. This ratio includes your monthly mortgage payment and is based on monthly gross income rather than take home pay.
| a) Total consumer debt payments (same as above) |
$600 |
| b) Total mortgage payments |
$800 |
| c)Total consumer plus mortgage debt |
$1,400 |
| d) Monthly gross income |
$3,200 |
| Total debt ratio to gross income = c) divided by d) |
44% |
What percentage of your gross income are you spending on debt payments? Mortgage lenders typically won’t lend money to someone with a total ratio more than 36% since the ability to repay it is questionable. At more than 36%, you should also be talking to a credit counselor about your debts.
Why Have You Gotten Into Debt?
- I really don’t know. I’ve just lost track of my spending.
- Convenience. I’m always rushed, so I buy things that will save me time.
- It’s easy. The credit is there, so I use it.
- There are lots of things I want, and I hate to deprive myself.
- Everybody else does it. Why shouldn’t I?
- I’ve had one or more emergencies in the past year that have gotten me into financial trouble.
- I can’t stop spending.
If the answers above are true for you, it’s time to think about the long term. What things will you be missing out on in the future because of the choices you’re making now? A ‘Yes’ to number 6 means a focus on the short term. You need to get back on your feet. A ‘yes’ to number 7 may mean that you need to deal with the issues that cause your behavior.
Compulsive Spending
Sometimes debt comes from easy-to-explain causes. You've been out of work for a while, or a family member has had a long and expensive illness. Sometimes it's just because you haven't kept track of your expenses, and things have slipped out of control.
But debt can also arise from compulsive spending. It's an addiction, just like drugs or liquor. You feel powerless to control it.
Do you feel that way? Has your spending interfered with your relationships? Does taking out a charge card and buying something give you a wonderful, heady feeling? Do you lie about the amount of money you are spending? Does your debt make you feel depressed and desperate?
Debtors Anonymous may be able to help. It is a twelve-step self-help group that follows the same principles as Alcoholics Anonymous. Look in your local yellow pages for a location nearest you.
