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How to Calculate Your Total Debts

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Claire Matthews

Financial Advisor, DCL

How to Calculate Your Total Debts

If you are having trouble keeping up with multiple monthly payments, you may benefit from calculating your total debts and developing a plan to reduce or eliminate your debt.  For some, debt consolidation is the answer.  Others can eliminate debt on their own by reducing their expenses and increasing their income. Regardless of the path you choose, understanding your debt is the first step on the path toward financial freedom.

Understanding Your Debt

Many Americans are overwhelmed by their debt, which can make it difficult to determine what the first step is to fix the situation. Organizing your finances may take a little time, but the important thing is to understand how much debt you owe and to whom, and which debts are costing you the most when it comes to fees and interest rates. In addition, understanding your debts will allow you to analyze whether you qualify for a debt consolidation loan or an alternative option for reducing your debts.

Document Your Debts

The first step to organizing your finances is to evaluate your debts and expenses. You will want to rank your debts by interest rate– those with the highest interest rates should be paid off first. Write down the total amount you owe to each creditor, and what the monthly payments are. Be sure to include annual fees or any other additional costs associated with your debts. In addition, you should check your credit score to see what is on your credit report and the status of your credit.

For each debt you have, note the balance, interest rate and monthly payment amount. Include every single debt you have: auto loans, credit cards, student loans, mortgage, personal loans, or any other debt you may owe. In most cases, you should focus on debt other than student loans and your mortgage. These tend to be long-term loans that have relatively low interest rates, so you will get more benefit from focusing on debt with high interest rates.

Debt-to-Income Ratio

Lenders and creditors tend to look at debt-to-income ratio of debt consolidation loan applicants, in addition to your credit score. This is the ratio of consumable debt versus your income. A mortgage or rent payment would not be considered debt in most cases, but credit cards and personal loans would be. To calculate your debt-to-income ratio, divide your total income by your total debts. The lower the number, the better your financial situation. If you multiply your debt ratio by 100, you will get a percentage you can compare to lender’s standards.

A good debt-to-credit ratio is between 10% and 15%. Ratios between 15 and 20% indicate a moderate financial issue, while ratios above 25% will make it difficult to be approved for any type of loan or line of credit.

Evaluate Your Expenses

Make a list of your monthly expenses other than the debts you have already listed.  This would include utilities, phone, food, gas, car insurance, and any other expenses you pay.  Be sure to include expenses such as child care, restaurants, entertainment, and unexpected events such as car repair, or a broken appliance. You should estimate an amount for any miscellaneous charges.

After listing all your monthly expenses, write down your total income. Compare your income to your expenses and subtract the two to see how much money you have left that you could use to pay down your debt. For most people, there may not be much money left after subtracting every expense from your income.

Examine your expenses and think about where you can make reductions so you can put more money toward paying off high interest credit cards. If you can reduce or eliminate just one credit card account, you will be saving money on interest as well. There are some simple cuts you can make that can make a big difference in reducing your expenses so you have more money to pay toward your debts.

Develop a Budget

Analyze your expenses line by line, marking the ones that you can reduce with a little effort. For example, right now you can’t reduce your monthly credit card payment, so don’t mark that one. You can reduce your grocery bill, so highlight that one, and so on and so forth. Think about ways to reduce each expense, but be reasonable with your estimates. Once you have gone through the entire list, make a note of the ways you can reduce each expense.

You can reduce your food and grocery costs significantly by changing your spending habits. Perhaps you can eliminate weekly restaurant outings, or that daily cup of expensive coffee. Many stores offer digital coupons you can load on your phone, so you don’t even have to clip coupons, or take the time to clip them and end up leaving them at home! You can also base your purchases on store sales, or try to combine coupons with items on sale, which will reduce the cost even more. Some may consider a membership to a discount or bulk grocery store, which can also add to savings on grocery costs.

It is up to you to determine what cuts you can make, and in what areas. You have to be honest with yourself about what sacrifices you are willing to make. Be reasonable, but also remember why you are doing this. You want to be debt-free, and it will be worth the effort. The more you can put toward paying off your debt, the faster you can pay it off.

Living on a Budget

Tracking your progress is a great way to stay motivated throughout this process. After a few months, you may begin to fall back into your old spending habits, but you need to stay focused. Seeing the amount you are putting toward your debt and watching your balance slowly get lower can help you stay on track and stick to your budget. You may also want to re-evaluate your expenses after a few months to see if there are additional cuts you can make.

During this time, you should stay away from all credit cards. This can be difficult, bceasue you don’t have much profit left over after paying your expenses and paying down your debt, but you must learn to live on your income alone. Accumulating more debt will defeat the purpose of making sacrifices to reduce your debt, so be sure to have a plan for avoiding credit cards and unnecessary purchases.

How good will it feel to pay off that first account? It should feel great, and give you motivation for continuing on this path. Don’t stop now. Keep going down the line of debts and pay off the next one, and the next, until you have eliminated all your high-interest debt. Paying off your first account is a significant accomplishment, but don’t become complacent in your goal of living a life of financial freedom.

Picking up a second job is easier than you may think.. There are many part-time jobs that have flexible schedules so you can work when you want and as many hours as you want. You may want to consider companies such as Uber or Lyft, or pick up a waitressing job. You can also look online for opportunities, as there are many legitimate money-making opportunities that require just a computer. Companies such as Upwork or Clickworker have a variety of online opportunities. Perhaps you can pick up babysitting or provide lawn care services, it really depends on you to determine the best option for your schedule and your talents.

When considering a second income, you should try to find something you enjoy. Maybe you can get your kids involved and have a bake sale, or you can offer dog-walking services. The options really are endless, but if you find something you enjoy doing, you are more likely to stick with it over time. You may even discover a new career opportunity, or you may have the chance to network with new people.

Debt Consolidation Options

Some people may still need assistance to eliminate or reduce their debt. A debt consolidation loan from places such as Discover debt consolidation or balance transfer may help some people eliminate or reduce their debt, but others have difficulty repaying the loan, or they end up paying more with the loan or balance transfer than if they would have just continued paying each creditor individually.

Debt Consolidation Loans

A legitimate debt consolidation loan company or organization will allow you to take out a loan to pay your creditors.  You will then repay the loan in monthly installments, including the loan fees and interest rates, until the loan is paid off.  If the loan is not enough to cover all of your debt, it may not work the way you want it to, because you will still be paying off another creditor with a high interest rate.

Before you sign the loan agreement, you should be aware of the details associated with the loan. If you have a low credit score, you can be charged a higher interest rate and higher loan fees, so it is important to understand all the fees and charges. Also consider the debt consolidation loan repayment term or loan period. It if the loan term is several years, you may end up paying more money in interest because of the longer term. The lender should show you what the total payment amount is, so be sure to pay attention and consider this before you decide to pursue a debt consolidation loan.

There are a few other things to keep in mind if you do decide to sign for a debt consolidation loan. Missing a monthly loan payment can be detrimental to successfully reducing your debt. You will be charged additional late charges and fees, in addition to the lender increasing your interest rate. This will make it even more difficult to repay the loan and still keep up with your other necessary expenses.

Balance Transfers

Many credit card companies offer 0% interest on an account if you transfer your balances from all other cards into this one. You can then make just one payment on this one account, instead of paying multiple creditors. While this may sound good, you have to read the fine print to get all the details.

First, you will be charged a transfer fee on the total of your new balance.  The fee is usually between 2 and 5%. So, if you transfer a total balance of $20,000, you will be charged anywhere between $400 and $1,000 for the transfer.

The 0% interest rate is an introductory offer that will expire after a few months up to a year. During this time, you will not accumulate any interest on the account balance, but you will have to make monthly payments on the balance. If you can make large payments to reduce the balance, then this may be a good option for you.  However, if you are only making the minimum monthly payments or barely above the minimum, a balance transfer may not be the best idea.

After the introductory period, the interest rate will increase.  This is where you need to read the fine print to understand what you are signing up for.  The interest rate could increase to above 25% once the introductory period has expired. If you’ve only been making the minimum payments, this is going to increase your balance and your monthly payment amounts. Depending on the amount you transferred, this could case even further damage to your finances, especially if you begin using the other credit cards that now have a $0 balance.

Calculating your debts will take some time, but it is the first step toward becoming debt-free. Use a debt payoff calculator to get a better idea of your specific situation. You cannot make the best decision for your finances if you don’t know how much debt you owe. Although you may feel overwhelmed by your debt, if you take it one step at a time, you can make a difference. By developing a budget and examining your expenses, you can make the changes you need to successfully become debt-free.

Claire Matthews

Claire Matthews

Financial Advisor, DCL

Claire is a noted financial writer and author of hundreds of articles about personal and business finance. Before getting her MBA, she graduated with a BS in Economics. Her coursework focused on the different ways that debt, debt structure, and debt restructuring affect micro and macro-economic issues.

Upon graduation, she took a job at an investment bank that worked with municipal and county governments to help them reorganize and structure their debt so they could continue to provide essential city services.

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