All Americans owe some level of debt -- there is no use denying or hiding the fact. How much you owe, though, will impact your financial health and future. According to the website SmartMoney, the average American in her 40s, making between $50,000 and $100,000, owes about $108,000 in household debt. Owing more than that, or having a debt load that eats more of your monthly income than recommended, might be a sign of financial trouble brewing. Simple debt-to-income ratios can help you gauge your financial health.
Factors in Determining Debt-to-Income Ratios
As you start looking at your financial health, you'll need to first understand what goes into determining your debt-to-income ratio. Debt, for most debt calculations, tabulates how much you owe, including mortgage, rent, credit card and department store debt, auto and education loans, and home equity loans or lines of credit. That figure is then measured against your after-tax monthly income. What is left is the amount you have remaining for savings, everyday expenses and emergencies.
Healthy Debt Ratios
Whether you listen to the federal government's recommendations or pundits writing on financial sites such as CNN, the Wall Street Journal or MSN's MoneyCentral, the recommended healthy debt load for households to carry is around 40 percent of income earned or less, before taxes. Factoring in taxes at an average of 20 percent and savings at a recommended level of 15 percent leaves you with about 25 percent of your monthly income for all other expenses. If you are bringing in $1,000 a week, as an example, that leaves you with about $250 per week for food, utilities, gas, medical bills and anything else.
Debt Ratios Showing You May Be At Risk
If a 40 percent debt-to-income ratio is deemed healthy, just a few percentage points above puts you at risk. According to US News, a debt ratio between 43 percent and 49 percent could you lead you on a fast track toward financial difficulties. Taking the $1,000-a week-income example, more of a debt load carves into either the recommended savings ratio of 15 percent or the $250 buffer you have built in each week for expenses. The other factor that places you at risk is the type of debt. If your 49 percent amount includes a large percentage of credit card debt, your credit rating could be at risk since many lenders see holding a large amount of revolving debt as a sign of an income struggling to meet expenses.
Debt Ratios Signaling Trouble
The standard amount signaling financial trouble for many debt-to-income ratio calculators, including those offered by the SmartMoney and US News websites, is around 50 percent. If you have a debt ratio higher than 50 percent, you are considered as needing financial help. Having about 10 percent of your income allocated for monthly expenses, or cutting into your monthly savings to pay for expenses, puts you at risk of overextending your finances or falling short in the event of an emergency.
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