The first step to ending your financial worries
See the current situation
you considering buying a new property on credit or taking out a loan to pay for your children’s education? Only you do not know if your finances allow you and you are undecided, bothered?
First step: determine your debt ratio! It is essential to evaluate your financial situation
This ratio is a unit of measure to compare your disposable income and the amount of your debts. Financial institutions use this concept to assess your creditworthiness, in other words your repayment capacity.
How to calculate it? Nothing’s easier.
All you have to do is add up all the monthly payments that represent debts such as rent (or monthly mortgage payment), home insurance, taxes, loan repayment (car, student), credit cards, etc.
Do not include in your calculation expenditures for food, utilities (telephone, electricity, transportation, etc.) as they are not considered to be debt-generating. However, these expenses will be taken into account when establishing your final budget.
Take the total of your monthly debt payments and divide this total by your gross monthly income, that is, before-tax income, including all monthly investment income. You thus get your debt ratio.
How to interpret the result?
Depending on the value of your debt ratio, your financial situation is more or less comfortable.
- If your debt ratio is below 30%, do not worry! Your current financial situation is excellent.
- If it is between 30 and 36%, it’s good but stay alert! Take the time to think before any new purchase or investment and remember: aiming for a lower ratio generally allows you to enjoy more serenity everyday!
- If your debt ratio is over 40% and you are starting to have trouble making ends meet, we recommend that you contact a counselor who can help you. In addition, a new loan would certainly be refused by financial institutions because they believe that it would be very difficult for you to repay this new loan.