Financial Check-In: Determining Your Debt

What’s my debt-to-income ratio?

Thinking about your debt-to-income ratio can be a big part of thinking about your financial goals, as well as your overall financial health. Carrying too much debt can lower your credit score, make it difficult to save (or even cover your day-to-day expenses), and hold you back from reaching your goals. Many experts recommend a debt-to-income ratio of below 36%, and at Compass, we want to help our clients manage their debt. Calculating your debt-to-income ratio is simple: it’s just the amount of debt you have compared to your overall income. You can use this calculator to find out what that number looks like for you.

Is your debt-to-income ratio in a healthy range (below 36%)?

Here are some tips for keeping it down:

Avoid adding to your debt.

This might sound obvious, but it can be easy to add to your debt without realizing how it will affect your financial goals. For some people, credit card debt might creep up around the holidays, or for others, it might be tempting to cosign on a loan for a friend of family member. Remember that any time you take on new debt (for yourself or someone else) is a major financial decision.

If you do take on new debt, make sure it is sustainable.

Sometimes, taking on new debt can be necessary, or even helpful for reaching your long-term financial goals. Maybe it’s taking out a student loan to help get a degree that will increase your earning potential, or maybe it’s purchasing a car that’s necessary to get to and from work. Whatever the case, it’s important to make sure you are getting a good return on your investment. It’s also important to make sure that you are only taking on debt that you will be able to pay off comfortably. If you are wondering whether to take on new debt, your Compass coach would love to help.

Is your debt-to-income ratio higher than you’d like (above 36%)?

Making a plan to lower your debt is the first step. Here are some tips:

Use the “snowball technique.”

Sometimes it goes by different names, but the idea is the same: Use a strategy that will allow you to pay off your debt faster and more efficiently. The snowball technique is especially useful for credit card debt spread across multiple accounts. The idea is simple: make some extra room in your budget to put toward your credit card balances, rank your credit cards, and pay them off one at a time. Just remember: no matter what strategy you use, always make at least the minimum payments on all your cards.

If necessary, go back to the budget.

It’s difficult (if not impossible) to pay down debt if there’s no extra room in your budget. If your expenses are higher than your income, you may find yourself relying on credit cards or loans to make ends meet. If you are just breaking even, it might be hard to put anything extra toward your debt payments. If this is true for you, it might be helpful to go back to the budget and find out if there is any potential for lowering your expenses or increasing your income.

Talk to your Compass coach.

Your Compass coach would be happy to talk to you about any debt repayment strategies. Even if you feel like your debt is overwhelming, we can talk about options, products, and strategies that can help. So if you want to talk in more detail about how to make the snowball technique work for you, how to make room in your budget to pay down debt, or other options that might be right for you, don’t hesitate to contact your coach.