We all want to get rid of the burden of debts. All you got to do is curb your expenses and earn your paycheck regularly. But is this as simple as it sounds? It is truly said that actions speak louder than words. So only when you actually try to get rid of debt by spending less, do you realize that the age-old saying easier said than done holds true.
The first step to get become debt-free is to build a strategy. You need to your current financial situation precisely. You need to analyze whether you are having more debts than you can deal with. This analysis is possible only if you exactly know where you stand in terms of finances. Thus the most adept way of becoming debt-free is by understanding what exactly is too much debt. This can be accomplished by determining your debt to income ratio. The debt to income ratio is a vital tool that aids in determining whether you can handle your current debt load. This ratio basically compares the amount you owe to creditors (debt) with your total earnings each month (income).
On calculating, if you find your ratio below 30% you are safe and need not worry as far as debts are concerned. The 30-36 % range is also ok. But 36-40 % range is like living on the edge, and you need to earnestly set up a plan of action to get rid of the debts. If your debt to income ratio is anything above 40%, then you are in dire straits and you are bound to have an arduous time in clearing off the debts.
This calls for the first step of calculating your debt to income ratio. To begin with, get a pencil and a paper. Make two columns, on one side right down your debts and on the other side right down your income each month. In the debt column you may record the following:
* Mortgage or rent payments
* Car expenses
* Education loan
* Other loan payments
* Credit card payments
* Medical expenses, etc.
Then sum up all these expenses to get your total debts. now similarly make a list of all the sources of income per month. Add them up to get the total income. Then divide debts by income to get the required ratio. The debt to income ratio thus denotes how dark the debt-clouds above you are. This then helps you to make the crucial action plan to clear off the debts.
