How to Tame Debt and Keep it Under Control!

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For most people, having to take on one or another form of debt sometime during their lifetime is inevitable. Some examples of debt that are commonly taken on are home loans (called mortgages), car loans, and student loans. If one chooses to own debt, it is very important to manage it correctly. There is a term often used in personal finance circles called the “Debt to Income Ratio”. The ratio is very simple; it just requires your GROSS income (gross income is your income before taxes and other deductions: it is important you use your gross income when dealing with debt ratios) and some type of income. Let’s put this in perspective. For argument’s sake let us pretend I work at a pizza place and make $700/month (gross, of course!) and I have a $250/month housing payment in addition to a $100/month payment for a car. My debt payments per month total $350. My income per month is $700, remember. Debt divided by income equals 350/700 which is 50%, or half. This is the debt to income ratio. It is fundamental to keep your debt under control, and to live within your means. It may be very tempting to lease a brand new car for just 100 more dollars a month, but if your current financial situation would not allow that, you should reconsider. Why is it so important to keep this ratio low? Well, the less you owe, the more you have control over. If you only have a 20% debt to income ratio, for example, that means you have control over 80% of your income, disregarding taxes and fees. With this portion you can save, invest, and use it for other expenses (maybe something silly like food). Long story short, if possible keep your debt down. If it is not possible to avoid debt all together, try your best to keep your debt to income ratio low and live within your means! You’ll be thankful in the end!

Student Editor: