FNTN

Introduction.

We often talk about being deep in debt – but do you really understand the depth of your debt? For some folk, whether they owe $100 or tens of thousands of dollars is pretty academic really as they see the depth of their debt as always being relative to the income they have. So, in simple terms, some one earning $500 a week and being $100 in debt would be considered to be in the same amount of debt as someone earning $2,000 a week with a $400 debt. However, although both people have the same ratio of debt-to-income – are these two people really in the same depth of debt?

Think in depth not ratios!

In the above example both of the people are in a debt of a 1/5 ratio of debt-to-income, of their weekly income. However, the person earning $500 a week will find it far more difficult to clear their debt than the person earning $2000 a week. Why? Well quite simply someone earning $500 a week will find it very difficult to end up with $100 of unused/disposable income at the end of any one week, whereas the person earning $2000 a week should, by reducing their expenditure for a week or two, quite quickly be able to clear their debt.

Disposable income and your depth of debt.

So, a more useful way to look at your depth of debt is to compare your debt to your disposable income. To do this simply add up all of your utility bills, rental/mortgage payments, average food bills and any other essential expenditure from your weekly or monthly pay check. Subtract that amount from your weekly or monthly pay check and that’s your disposable income, cash you can spend on whatever you like. If you have no disposable income, stop reading this now and seek expert debt counseling. Otherwise, next total up all the debts you’ve got and how much their weekly or monthly repayments are. Divide the figure for your debts by the disposable income you’ve calculated and multiply that by 100 to get a percentage. (debts/disposable income x100). If you end up with a figure less than 100% then the depth of your debt isn’t too bad and, with some careful planning, you could clear your debts in a year if you really budget for it. If your figure is over 100% then you currently owe more than you can afford to repay and you are deeply in debt. Debt counseling will be of benefit to you or alternatively perhaps you should seek a debt consolidation loan.