First Person: I Can’t Afford to Take on More Debt

Yahoo Contributor Network

I checked out my debt-to-income ratio using a personal finance calculator at US News and World Report's site just to get a reality check. I sometimes feel as though I'm over my head financially. At the same time, I am trying to determine whether I can afford to take out a new car loan. According to the site, I'm doing well financially if I have a high enough income to support my debt. It's all about the ratio of debt to income. The more income I have, the more debt I can "afford." Somehow the concept doesn't seem right to me. Debt is repugnant to me on an emotional level.

Measuring what I owe against my income

In order to figure out my debt-to-income ratio, I typed in my monthly mortgage payment of $932. Then I added in my current car loan payment of $300. I also had a few other loan obligations that I added to the mix. Even though the calculator asked for my "minimum monthly credit card payments," I didn't feel that worked for me. I put in the minimum amount I have to pay in order to feel as though I'm actually making headway on my debts.

Calculating my income

Although I could easily afford to take on more debt if I considered my income as well as my husband's income, I'd rather know if I could afford someone on just one income. Instead of using both of our incomes, I just plugged in my husband's salary. Our debt-to-income ratio based on his salary still put us at 30 percent, which fell in the healthy debt load category. However, if we took on a car loan of $400 a month, we'd have a debt-to-income ratio of 37 percent, which is considered "not bad." However, the site advises people with that ratio start paying down debt before they get into trouble.

Deciding to wait on purchase

Instead of taking on a new car loan, we decided to work on paying off our current car loan. We will also try to save more money toward a down payment on our next car. I've figured out my debt-to-income in the past when I wanted to purchase a home. However, I realize how I should get a rough idea of my debt-to-income ratio anytime I want to make a major purchase.

The reality is I simply can't afford to take on more debt because the job market where I live is still uncertain. I may be able to easily afford a new car now, but if I lose my job we won't need an additional car. I'm making it my goal to stay below the 36 percent mark so that my debt remains manageable. It's also exciting to see what our debt situation will be like after we pay off our house and credit cards. Our debt-to-income level may sink down as low as 12 percent when we have a zero credit card balance and no mortgage payment. Knowing there is an end in sight, it keeps me motivated as I pay our bills each month.

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More from this contributor:

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