Are You In Too Deep?

Are You In Too Deep?
In today’s economy, your number-one goal must be to achieve a “debt-less” state… to be totally debt-free. When you have any amount of debt, you pay interest. Interest is money you give away, usually for the instant gratification of purchasing something before you can really afford it.
The things you purchase on credit are often items that bring you no appreciation of value in return. By the time you finally pay them off, they are worth less than when you bought them –or they are
just plain worthless. And all too often, the things you bought no longer exist or were never tangible in the first place. You don’t even remember enjoying them. In short, you have nothing to show for your long months or years of indebtedness.
By now you’ve heard enough of the argument against debt. You probably have other burning questions, such as “How do I know if I have too much debt?” and “What can II do if I am in over my head? This chapter will answer those questions.
Where Do You Stand?
According to the nonprofit Consumer Credit Counseling Service, you are in debt too deep if more than 20 percent of your net income goes to pay debts (excluding your mortgage).
Take out a calculator now and figure out your monthly debt ratio –the percentage of your takehome- pay that goes toward paying your non-mortgage debts. To determine this ratio, divide your total monthly debt payments by your total take-home pay. For example, let’s assume you bring home $4,000 per month and your monthly debt payments total $1,000. Divide $1,000 by $4,000 and the result –25 percent– is your monthly debt ratio.
You should also know your annual debt ratio, which may be higher or lower than your monthly debt ratio. Determine the annual  ratio by dividing your total outstanding debt (excluding mortgage) by your annual take-home pay.
For example, if your annual take-home pay is $50,000 and your non-mortgage debts total $14,000, your annual debt ratio is 28 percent. If either your monthly or annual debt ratio is over the 20 percent mark, you are drowning in debt and need to take immediate action. Don’t panic, though. You are on the right track because you are learning how to break free from debt. You have made the essential first step toward financial health.
If your monthly or annual debt ratio is between 15 and 20 percent, you are not yet drowning but you are definitely in deep, turbulent waters. It’s time to stop the debt cycle so you can start working toward financial independence and peace of mind.
(By the way, keep in mind that your debt ratio is not constant; it changes as you pay down debt, incur more debt or have increases or decreases in take-home pay.)
What if your debt ratio is not over the 15 or 20 percent mark? Look at it this way: If you have any debt at all, you are at risk because you are throwing away good money that could be making you rich. Your score on the Debt Test will help to determine if debt is holding you back or threatening your wellbeing.

Take the Debt Test
Calculating your debt ratio is the most objective way to determine if you are in too deep with your creditors. But it’s not the only way.

Also ask yourself these questions:
1. Am I using my credit cards more often than before?
2. Am I using my credit cards to pay off household bills, such as the electric and telephone bills,
or consumables, such as food or haircuts?
3. Are my credit card balances at or near their maximums?
4. Am I paying the minimum due on my debts each month?
5. Am I sometimes late paying bills, or do I send payments in at the very last minute, or do I send
post-dated checks?
6. At the rate I am paying off my debts now, will it take me longer than18 months to be debt-free?
7. Is my savings account staying the same, or shrinking, or do I often dip into savings to make
debt payments?
8. Am I afraid to talk to my spouse about our debt, or do we argue about it a lot?
9. Do I frequently worry about my debt?
10. Am I getting letters or calls from creditors or collection agencies?
11. Am I uncomfortable with the amount of debt I have?

If you answered “yes” to two or more of these questions, chances are you have too much debt, even if your debt ratio is less than 15 percent.
Question 11 is especially important: Some people are uncomfortable with any amount of debt. If that’s the case with you, thank your lucky stars. It’s much better to feel that way than to take a laissez-faire, devil-may-care approach to debt. People who are not bothered by debt are more likely to get in over their heads.