Debt seems to be one of those crazy, nonsensical rites of passage when it comes to finances. Your 18th birthday hangover has barely budged before the banks are hounding you down.

 It’s like … congratulations, you’re an adult … now, here, have a credit card. Not entirely acting with your best interests at heart, are they?

Credit approved!

And yet, it’s easy to find ourselves tempted with these offers … you know, “just in case”. Unless you’re a saint when it comes to spending, it won’t be long before you could find that you’re paying a good whack of your income towards those dreaded debts

But what’s considered a reasonable level of debt, anyway?

Optimal rates vary depending on who you ask, but a good rule of thumb tells us that if your debt repayments are 20% or more of your take-home pay, you may need to be having a closer (read: long, hard honest) look at your finances. Right, so how do we work this out? 

It’s actually not all that difficult, so let’s get to it … 

How to Calculate Your Debt-Income Ratio 

1. Know Your Numbers 

Firstly, you’ll want to find your take-home pay. This is the amount your employer pays into your bank account, after your tax and other deductions. Check your bank statement for your salary or wages payments, or grab your latest payslip to find this amount. 

If this isn’t a set amount per month, do your best to calculate an average monthly income based on the last 3 months worth of income. (All income amounts for the last 3 months divided by 3.) 

Next, get real with your monthly debt repayment commitments. For the sake of this exercise, this excludes a bond or mortgage repayment, but it does include: 

  • Credit card debt 💳
  • Short-term loan agreements 
  • Student loan 
  • Car finance repayments  🚙
  • Basically, anything that you’re required to pay back per month, that’s accruing interest

Remember that if you and your partner share expenses and debt repayments, you should combine your income and debts for this calculation. 

It's OUR debt now

2. Crunch Your Numbers 

Now that you have both your income and debt repayment values, we can get on with the math. 

(Don’t worry, I’ll wait while you grab the calculator!) 

  • First, take your take-home pay and multiply this amount by 0.15. This will give you 15% of your take-home pay.  Make a note of this number. 
  • Next, take your take-home pay and multiply it by 0.20. This will give you 20% of your take-home pay. Again, jot this number down.

3. Face Your Numbers 

Ok, so now if you compare your total monthly debt repayments to the percentages, how do you stack up? 👀

(Important note: I’m not a qualified financial advisor, so please take these as helpful guidelines and suggestions only, and not as financial advice.) 

Here some recommendations based on your results: 

Debt repayments less than 15% of your take-home pay 

Well done, you! You’re in a good place from a debt perspective. 👊

Why not add a little extra to your debt repayments per month to get them cleared quicker and save on interest payments? Don’t exceed 20% of your take-home pay, though! 

Debt repayments are between 15% and 20% of your take-home pay 

You’re doing alright, but you could consider cutting back on a few extras per month. Do you really need that Amazon Prime Video subscription or extra skinny chai latte? Instead, plug those £££’s into additional debt repayments and watch those balances drop! Believe me, it’s way more rewarding than any impulse purchase will ever be.  

Debt repayments are more than 20% of your take-home pay 

Ok, this isn’t ideal. It’s time to take a good look at your spending habits and where you can cut back. It’s a slippery slope, and you definitely don’t want to be in a place where you can’t afford your monthly commitments. Do whatever you can to slash your expenses and/or increase your income - ideally both. Don’t panic, though. Act from a place of knowledge and empowerment and make the small changes each day that will accumulate to a big dent in that debt in no time! 

Food for Thought 🤔

If you were a Gravity user, you'd automatically qualify to become an Introducer, which can help you to earn a passive income from successful referrals. All you need to do is share your Introducer link with your family and friends, and if they sign up for Gravity, you’ll earn a percentage of their transaction fees, paid in BSV, daily. Think of it as a stress-free side hustle to boost your wallet! 

Key Take-Aways 

  • Debt is an almost unavoidable consequence of traditional finance. Take care to manage it properly and avoid making ‘everyday’ purchases on credit. 
  • Keep tabs on your debt to income ratios, and avoid creeping above 20% to debt repayments. 
  • Aim to decrease your expenses and / or increase your income to allow you to pay off debt quicker.
  • Whenever possible, make additional payments towards debt to reduce the total amount of interest you’ll pay. 
  • If your monthly debt repayment commitments are more than 20% of your take-home pay, take action TODAY. This will save you the distress of more dramatic remedial actions tomorrow. 

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