The easiest way to determine how healthy your debt load is will be from your monthly budget. You can also look at your net worth analysis and debt to income ratio as well as use the following calculations to monitor healthy debt load.

Current Ratio
Liquid Assets divided by current Liabilities (Ideal result is equal to or greater than1.0)

The current ratio means the dollar amount liquid assets that you have to support current liabilities. To find the current ratio, you will need to know the total of your liquid assets – these are assets that are readily convertible to cash, such as CD´s mutual funds, stocks, savings accounts and the like. The next step is to total of your current liabilities, representing a years worth of monthly debt payments. To do this, add your monthly mortgage payment, car loan student loan, minimum monthly credit card payments; then multiply by twelve. Finally divide the liquid assets by the current liabilities ideally; the result should be 1.0 or higher, indicating that the client has enough money to get them through an emergency, if there is a disruption of income. If it is lower than 1.0 there´s no need to panic. You can consider options for decreasing your debt load or increasing liquid assets.

Debt Ratio
Total Liabilities divided by Total Assets (Ideal result is less than1.0)

The debt ratio is yet another tool for you to have in your arsenal. This measures total debt against total assets. First determine your total liabilities (total Balances of all debt owed) and then divide by your total assets (total value of what you own). In this case, you´re aiming for a number less than one, which would indicate that you own more than you owe.

DEBT-TO-INCOME RATIO
All Monthly Debt Payments divided by Monthly Gross Income (Ideal result equal to or less than 36%

Debt-to-income ratio is a tool used in determining if you can afford to take on more credit. Now we will use just the backend to help you determine the health of your debt load. This number looks at an individuals current monthly payment obligations. Take the total monthly debt payments, including mortgage payments and any court ordered child support and divide that number by the your monthly gross income. Ideally, the result should be equal to, or less than 36 percent.

Many of you may have had a negative experience relate to debt. You may have even vowed to never to use credit again. Yet, it´ important that you know that credit has a valuable role in our economy, and frankly it can be impossible to perform some activities- like renting a car or booking an airline ticket, not to mention buying a home- with out credit.

Basically debt can be considered good when it´s used as an investment to improve your life or livelihood, such as a mortgage to buy a home or a student loan to advance ones education. Debt can also be considered good if it´s as a spending tool for smaller purchases, but only when it can be paid off over a short period of time, such as by the end of the month.

Bad debt includes credit card debt that accumulates and doesn´t get paid off monthly, which results in high interest costs and perhaps even late fees. If you used a credit card to pay for dinner at a restaurant and the balance is still outstanding after a year, that´s definitely bad debt. Another bad debt is known as Payday Loans. With this form of credit a borrower writes the Payday lender a check postdated to the borrower´s next pay day and then receives the check amount minus interest can be as high as 400 percent!

SECTION 3: REPAYING DEBT OR NOT
WARNING SIGNS

Unfortunately, not everyone is or can be well organized. Let´s look at some of the warning signs of debt gone astray:

• The obvious one is you start to miss payments. Why is this happening? Is it poor time management or do you lack the funds to make the payments?
• Collection agencies start calling you. You may want to familiarize yourself with the Fair Debt Collection Practices Act. This act sets forth the guidelines a debt collector must follow when pursuing payment of outstanding debts owed by consumers. It also sets forth procedures for the consumer to file complaints against debt collectors they feel have violated the laws.
• You find yourself shuffling payments or “rob Peter to pay Paul”. This is most likely occurs due to insufficient funds. You start wondering which bills to pay first, the ones with higher interest rates or the lower dollar balances. Rent or mortgage should always be the first bills paid.
• You start going into the grace period, this suggest either bad time management or lack of funds.
• When you are near the credit limit on your credit cards, is definitely a warning sign. Are monthly minimum payments being made? I not, how can you budget more effectively?
• Cash advances on credit cards are NEVER a good idea, so if you are in this habit , it´s a clear sign of credit danger. The fees and finance charges on cash advances can be exorbitant. Once again, this is a sign that you need help with cash flow management.
• When creditors start to close your accounts. This is certainly not a good sign. After all they make all of their money from late fees and finance charges. Obviously, closing accounts means the lender no longer believes that you are a good credit risk.
• If your debt payments are not enough to cover the interest due, the outstanding balance will increase instead of decrease. This is called negative amortization- a clear warning sign of financial distress.

• Set up either automatic payroll deductions or pay your bills over the internet.
• Organize your bills on a computer spreadsheet- but if you check it; other wise what good is it?

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