Today I need to walk you through, understanding the Debt to income ratio so you see how significant the debt load you are carrying is. I will likewise show you how to calculate it. These are the basic indicators that the credit providers’ lenders additionally take a look at before they grant a loan (advance).

“With great power, comes great responsibility and the reverse is also true, with great responsibility comes great power –  when we take responsibility by taking action, we have the great power to make it better and most importantly is controlling how we feel – curiosity, excitement” – Jim Kwik

Controlling and seeing your debt obligations through to the end demonstrates the most money-related responsibility that you will ever have towards yourself, your friends and family, and both your current and future financial planning.

It is constantly a smart thought to make sense of how much obligation/load you have and compare it with the amount you earn. Another way to look at it is to see that the (income you bring home is used to satisfy your basic needs and obligations. This activity will help increase your understanding of your monetary standing (financial well-being check).

Money Management tip: Keep some for yourself

Let us show you how to work out a debt-to-income ratio(debt load), which means how much debt is spent on the salary earned. The debt burden is the sum total of all the money owed by you to your creditors, whether determined month-to-month or total sum owing, so you have a clear view or perspective on where you stand.

Let us use Jimmy Soap as a random example to work out the debt burden to present the point. Let us state that his all-out month-to-month debt load is equivalent to R11 500.00 and his monthly home pay(earnings) after tax is equivalent to R15 000.00. Therefore, his ratio of all his debt burden divided by his net earnings is equivalent to (R11,500/R15,000 X 100 = 77%).

It implies that the greater part of his monthly earnings goes to pay his debt obligations, and the question is how he lives from month to month, and that is no way to live. That is the reason it displays living on credit (personal advances, credit cards, car payments, overdrafts, microloans ) to endure until the following month, and the next coming months, until he can’t endure it any longer, which from the beginning leads to denial, point of blame, stress, and at that point, frustration or disappointment sets in, which leads to self-destructive thoughts and helplessness.

If the proportion is between 10-30%, your debt-to-pay proportion (ratio) is acceptable yet satisfactory, it is endurable(bearable) to a certain extent, and you are still capable of handling your income(money) and paying off your debt competently.

You should have noticed by now that when the ratio is above 40% to 50% and above, it is a serious warning flag and needs quick and immediate intervention, or else you are in a high-risk zone (financial ruin).

It surely will be announced to you soon by your creditors, and you could wind up in genuine financial trouble where perhaps we can call you bankrupt if you don’t take immediate action to address the circumstance. It can be compared to running or driving a vehicle on an empty tank with no oil in the engine and hoping for a miracle to reach your destination.

Overindebtedness (failure to pay and meet all your debt obligations)

In the event that we take a look at Jimmy’s example above, it will in all probability bring about credit providers and lenders walking out on you and being less likely to lend you a hand when you need it the most (open and extend any credit/advance to Jimmy) or in all likelihood, he will open himself up to being either sent summons or court appearance or charged an exorbitant(high) loan cost (value) if he somehow managed to approach the microlenders, as a last resort.

It is perhaps prudent to stop here for a minute, before we discuss taking up more credit and, furthermore, genuinely consider the repercussions of our way of life, which we are trading off, our friends and family, and our future potential for creating generational wealth.

Consider it along these lines, investigate Jimmy’s model over a portion of his income that goes to support debt obligation, and it is no big surprise that it attracts unnecessary pressure points (stress), blame, shame, and guilt. It is absolutely unnecessary that he finds a solution at this point, and there is an exit plan—yes he can! If interested in further reading, I recommend my blog post on Getting Out of Debt Permanently.

Thank you for taking the time to read this blog post. You are welcome to leave a comment, question, or share your story, and we will get back to you. Thank you once again for gracing us with your presence.