Bad Debt to Income Ratio

*Featured in The Carnival of Personal Finance #233 hosted by @RevancheGS on A Gai Shan Life.

Debt-to-Income-Ratio is the amount you owe measured against your income.
Motley Fool’s Get Out of Debt worksheet is what started my family’s debt free journey and blogging about our personal finances.

In the beginning, the family’s bad debt-to-income-ratio was approximately 112% paying $3496.27 annually in interest!

About the Worksheet

The first part of the worksheet is figuring out the interest you pay on the debt owed. Watch out, this part may sting a bit.

To figure the interest you pay on your bad debt is to take each card or loan and figure the calculation:

Balance x APR (annual percentage rate) = Annual Interest Paid

 

 

 

Now, add the last column’s figures all together and Wha la! you have the Annual Interest Paid per year. Hope it didn’t hurt too bad

or you could…

use the Excel sheet at the end of this post.

Next, the worksheet requests you to figure your bad debt-to-income ratio.

 

The difference between Motley Fool’s recommended calculations and others – the Fool’s worksheet has you calculate the bad debt to your net income. Most calculations request that you use your gross income. Why the difference? Because the fool wants to entice you to jump start your debt free journey (let me tell you 112% gets you moving like a jolt of electricity).

Try the worksheet for yourself. Understand, where your financial nature stands. It’s amazing how energetic you’ll become in wanting to pay down your debt when you discover just how much interest you are paying annually.

Where does my family’s bad debt-to-income-ratio stand now? 93%.

How to Use the Excel Sheet

I had problems posting a workable Excel sheet on this screen, click here to be directed to a full version.

Enter the requested information – APR & Balance of card or loan – and the Annual Interest Paid will automatically be calculated for you.

What’s Your Score?

Your debt-to-income ratio

36% or less: This is a healthy debt load to carry for most people.

37%-42%: Not bad, but start paring debt now before you get in real trouble.

43%-49%: Financial difficulties are probably imminent unless you take immediate action.

50% or more: Get professional help to aggressively reduce debt.