Today, many people are living on the edge of a financial cliff, oftentimes with the burden of debt chained around their legs. According to a recent analysis by the New York Federal Reserve, 1 out of every 7 households in the U.S. has a negative net worth.
Don’t let this happen to you; know where you stand with your debt. Consider the following questions to gauge your own financial health.
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“Do I have too much debt?”
Without doing any calculations, you likely know the answer to this question in your gut. You may feel like debt is preventing you from financial goals like travel, saving up for home, or building a cash cushion in your checking account to keep you from constantly feeling stressed out about money.
Instead of relying on your gut, use what’s called the debt-to-income ratio. This ratio measures how much of what you earn goes towards paying off debt.
To calculate your debt-to-income ratio, add up your monthly debt obligations and divide this number by the amount of money you earn in a given month. Not your gross income; I’m talking about the amount that hits your bank account each time you get paid. Using your net income provides a much more accurate picture of how much of your earned cash is used to pay off old debts.
“Am I paying other bills on time?”
Perhaps you understand the importance of never missing a credit card payment because of the ripple effects on your credit, so you end up late on other more flexible obligations such as rent, utilities, and other must-haves like a phone bill. It then becomes a delicate dance of cash flow management by delaying payment to select creditors until you get paid again and can settle the bill.
If you’re struggling to pay all of your bills on time due to misalignments in your cash flow, ask your creditors to adjust your bill due date. If you have a large cluster of cash going out in the first week of the month, having $150 of these bills shifted into the 2nd or 3rd week might give you enough breathing room in your checking account to get through the month.
If this keeps happening to you, then you are likely carrying an unmanageable debt load. According to the Consumer Financial Protection Bureau, if your debt-to-income ratio is above 43%, you’re at a higher risk of not being able to make your monthly payments.
“How much am I paying in interest?”
If you are paying off your credit card balance in full each month then you are doing great. If you’re carrying a balance, on the other hand, how quickly are you paying it off?
Most credit card companies calculate the interest you owe based on an average daily balance. That’s right, daily.
Consolidating your debt into a low-interest credit card, perhaps with a promotional rate, could help you save money in the long term by reducing the amount of interest. Not to mention the mental bandwidth of keeping up with multiple credit card due dates and having to guess how much you should pay each time. Tools like NerdWallet and Credit Karma can help you review and choose the best card for your situation. Keep in mind the ripple effect of opening up a new line of credit. It will show up as a recent inquiry on your credit report and reduce the average age of your credit history.
Everyone has a different financial backstory and circumstances, but if things are really bad and the debt feels inescapable, then filing for personal bankruptcy may be the right choice for improving your financial well being. You might also consider seeking a not-for-profit financial counselor, such as Navicore Solutions. Another option is to join a Debt Collective, which leverages the power of collective bargaining to reduce the amount you owe. This is especially helpful if you’re struggling with student loan debt from a for-profit college.
If you’re being kept awake at night by money troubles, make sure to seek the help you need. Honestly, you aren’t the only one.
