The sum total of all the money you owe is what's commonly known as your debt load. To determine whether your load is more than you can afford, you'll want to calculate your debt/income ratio by comparing the amount you owe to the amount you earn.
Follow these four simple steps:
1. Calculate all your monthly debt payments. If you don't have fixed monthly payments, you can estimate your monthly payments as 4 percent of the total amount you owe.
2. Take your gross annual wages and divide them by 12 – that's your monthly income.
3. Take your monthly payments total and divide it by your monthly income.
4. Move the decimal point two digits to the right to make it a percentage – that's your debt/income ratio.
A debt/income ratio of 10 percent or less means that your finances are exceptionally healthy, and ratios within a range of 10 to 20 percent represent good credit, but at 20 percent or above, it's time to assess your debt load. Creditors will be less likely to give a loan to someone with such a high debt/income ratio and creditors that do tend to charge higher interest rates.
Another way to gauge your financial health is to calculate your net worth, which is the total value of your personal finances.
Assets – Liabilities = Net Worth
Though one size doesn't fit all when it comes to debt, there are two ways to manage your loans. Consider the implications of your financial situation before choosing a method – then stick with it.