For this step we’re going to find out how much of your monthly income goes directly toward paying down down your debt, also know as your “debt burden.” For this, you’ll need your gross income (your income before taxes are taken out) and all of your monthly debt payments. This should include mortgage/homeowners’ insurance, minimum credit card payments, car loans, student loans, tax payments, and anything else that applies to you. Don’t include things like utilities or rent.
We know, we know – we brought you as far as we could without breaking out the calculator. But sometimes you really do need to do the math to figure out what the best course of action is:
MONTHLY PAYMENTS / TAKE-HOME INCOME (MONTHLY) x 100 = % OF DEBT BURDEN
For example, if my take-home income is $1,500 per month, and I pay $250 per month on a car loan and have a credit card with a $36 minimum payment, my debt burden is 19%.
Generally, you want to keep this percentage under 36%, but the lower the better. Not only is this number useful for evaluating your own financial situation, but lenders will often use this same calculation when making an application decision. Keep this percentage handy while we finish up with the final step.