Calculating your debt zone
If you are paying off debt, your monthly payments should be about 20% or less of your net income. If you are paying with more than 20% of your income, you may be in the debt danger zone. First calculate your net monthly income or your take home pay. Then enumerate all your outstanding debt that you are paying monthly, like credit card debt, student loan, or a car loan. Get the total amount you allocate for paying off debt, and divide this by your net monthly income.
- If your total payments combined are 15% of your income or less, you should consider paying more to finish the payments faster.
- If your total payments amount to 15 to 20% of your income, avoid getting into new debt.
- If your total payments are more than 20% of your income, you may be in the debt danger zone. Do not get into new debt and try cutting back on other expenses to get your debt payments down to a more manageable level.
You may do this computation individually, or as a household, whichever you feel is more appropriate. For more information, click here.