The debt ratio is the measure of one’s total liabilities expressed as a percentage (or decimal) of their total assets. A prospective lender uses this ratio to decide on whether or not to lend as it shows one’s ability to pay off their abilities with their assets. The ratio indicates how many assets one has to dispose of if they are to pay off all the liabilities. I will use my debt ratio to measure my financial leverage. The understanding is that a higher debt ratio means higher leverage and a riskier proposition on the lenders' end. It should inform the lender on whether or not I will be able to pay off any debt extended to me in the future or when hard economic times hit.
A comparison of my total liabilities to the total assets shows that lenders would not be overly concerned with my ability to pay back my debt if I were to receive one. After calculations, I found out that I have a debt ratio of 0.85 (85 per cent). This ratio is less than one which can be interpreted to mean that I am more stable and my ability to pay back debts is not a doubt. It is an indicator that I have more assets than liabilities, although just slightly. As such, only a part of the creditors owns, in part, my assets. If I was to pay my debts in an instant, I would not have to sell all the assets, and that is a good thing for lenders as their primary concern is to get their investment back.
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Although my debt ratio does not look bad, I still need to reduce my expenditure so that I can fulfil my long-term goals. Some months I look at my bank and credit statements only to realize that I spend more than I think I should be spending. I have, therefore, chosen to avoid this problem by having personal financial statements which help me track expenditure and income. These assist with an individual financial condition and assist with budget planning.
Personal debt management is a critical tool for individuals. It is more important as according to MSN Money, almost half of all American families are spending more than they are making yearly. Additionally, households carry some $8,000 in credit card debt with personal bankruptcies having doubled in the past decade. To be able to pay off my debts and save $ 5000 by 2020, I would need to manage my debt more productively. My worries are not with the amounts I owe but rather the ability to pay and pay in time. If I am unable to pay back my debts, I would be putting my possessions as well as my goals at risk.
There are many ways in which debt can be used for good. In my debt management plan, I am considering some of the following possibilities. First is by leveraging good debt to increase my finance education which in turn increases my wealth. Secondly is by negotiating credit card debt to increase my production while decreasing my liabilities. Thirdly is by having the understanding that debt income ratio can affect my creditworthiness. Finally, I will be making efforts to reduce my consumer debt which in turn increases my cash available for investment. These efforts, when followed well will ensure that lenders can lend to me without fears that I cannot pay back. To conclude, a debt management plan provides that individuals reach their goals faster, and mine is to have saved $5000.00 by 2020 and paid off my total debts.
