If you find yourself overwhelmed by debt, you're certainly not alone.
Like many Quebecers, you may be looking for a lifeline to get you out of this tricky situation.
Debt can happen to anyone, whether it's because of a hard blow, job loss, or simply because life is sometimes more expensive than our income allows us to manage.
Here, I'm going to tell you about a super-useful tool: the debt-to-equity ratio.
It's a bit like your golf score: the lower, the better (😂).
This ratio is basically the proportion of your monthly income that goes directly towards repaying your debts.
Financial institutions love it because it tells them whether or not you're a good player in the credit game.
So, are you ready to dive into the world of debt ratios?
Follow the guide, I'll explain everything! 👇
Understanding the debt-to-equity ratio
The debt-to-equity ratio is like a thermometer of your finances.
It measures the temperature of your financial health by highlighting how much of your income goes towards debt repayment each month.
Calculating it is simple: you take your total monthly debts, divide them by your gross monthly income, and multiply by 100 to obtain a percentage.
This famous percentage is your debt ratio.
But don't confuse total indebtedness with debt ratio!
👉 Take two households, for example.
Household 1 spends 800 $ per month to repay its debts, with an income of 3000 $.
Household 2 also spends 800 $, but with an income of only 2000 $.
Even if both households have the same amount of monthly debt, the impact on their budget is not the same.
For household 2, the debt burden is much heavier.
This is where the debt-to-income ratio comes in: it takes into account not only how much you owe, but also how much you earn, to give a clear picture of your ability to manage your debt.
So how do we stay in the green?
Ideally, you want to keep your ratio below 33 %. ✅
This means that your debt repayments should not exceed one-third of your total income.
This gives you room to maneuver in case of unforeseen events, and reassures your bankers.
If your ratio climbs above 40 %, it's time to sound the alarm and take a closer look at your finances.
A ratio of 50 %?
This is the signal that you absolutely must review your budget management, or even seek professional help. 🚨
The key to maintaining a good ratio is to keep a watchful eye on your spending and not give in to the temptation of easy credit.
Remember, credit is money lent, not offered.
Before you splurge on the latest gadget or book that dream trip, take a moment to assess the impact on your debt-to-income ratio.
And if you're feeling a little lost in all this talk of percentages and debts, don't panic!
Experts are on hand to help you navigate these sometimes murky waters.
Calculating the debt-to-equity ratio
Now that you've grasped the importance of the debt-to-equity ratio, let's look at how to calculate it.
It's like preparing your favorite recipe; follow the steps, and you'll have a tasty result, or in this case, an accurate overview of your financial situation.
1️⃣ List all your monthly debts Start by writing down every cent you owe each month.
This includes your mortgage or rent payments, car loans, credit cards, student loans, and even that personal loan you took out to finance your kitchen renovation.
2️⃣ Calculate your gross monthly income : This is the total amount you earn.
If you have variable sources of income, average them over the last few months to get a reliable estimate.
3️⃣ Do the math Divide your total monthly debts by your gross monthly income. Take this figure, multiply it by 100, and voilà, you have your debt-to-income ratio as a percentage.
To make things clearer, let's imagine that your monthly debts amount to 1,000 $ and that your gross monthly income is 3,000 $.
Your debt-to-equity ratio is therefore (1000/3000) X 100= 33.33%.
You're right on the edge of what's considered financially healthy.
If this percentage climbs, it's time to review your expenses.
Maintain a good debt-to-equity ratio
A good debt-to-equity ratio is the key to robust financial health and keeping the door open to future credit opportunities.
Here's how to keep it green:
✔️ Budget wisely Stay in control of your finances by drawing up a budget and sticking to it. This will help you avoid impulsive spending that can inflate your debts.
✔️ Increase your income : Sometimes cutting expenses just isn't enough. In that case, consider ways to increase your income, whether by asking for a raise, finding a side job, or turning a hobby into a source of income.
✔️ Pay more than the minimum On your credit card debts, try to pay more than the minimum payment each month. This will reduce the principal faster and save you money on interest.
✔️ Avoid taking on new debt : Before taking out new credit, ask yourself if it's really necessary and if you can afford to increase your financial commitments.
✔️ Consult a professional If you feel the situation is getting out of hand, don't hesitate to consult a financial recovery advisor. He or she can help you draw up a personalized action plan to improve your situation.
By following these tips, you'll be well on your way to keeping your debt-to-income ratio at a healthy level and living a more serene financial life.
Remember, managing your money is a bit like tending a garden: it requires regular attention, but the results are worth it.
And if you have any questions, I'm here to help.
Navigating the sometimes murky waters of personal finance can be complex, but with the right tools and a little know-how, you can stay on course for financial security.
Contact us!
Now you have a better idea of what the debt-to-equity ratio is, how to calculate it and, above all, how to keep it at a healthy level.
Staying out of debt is a bit like exercising: it requires discipline and sometimes a few sacrifices, but the benefits to your financial health are more than worth it. 💸
If you ever feel overwhelmed, remember that there are professionals on hand to support you.
Please do not hesitate to contact us.
Above all, remember that you're not alone.
We're here to help each other, so if you have any questions or need a helping hand, our door is always open.
Contact us right now! 📱
