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Calculate Your Debt Zone: Are You Safe or in Danger?

Buried in debt paperworkFinancial experts recommend that no more than 15 to 20 percent of income is used for paying consumer debt. This doesn’t include your mortgage, which falls into a different category than consumer debt, but does include credit card debt, student loans, car loans, and other types of loans.

Your goal: to have less than 15- to 20 percent of your income earmarked for debt payments. If you pay more than this, you’re in the danger zone and possibly in over your head with debt.

Calculate Your Debt Zone

Add up your debt. Make a list of all your debts and financial obligations.

Know your monthly take-home pay. Look on your pay stub for your "take-home pay" or "net earnings" categories. Or, if your paycheck is deposited automatically, check your bank statement for the amount that is deposited into your account. This is your take-home pay. Multiply this by the number of times you get paid in a month. This is usually two — if you get paid on the first and 15th of the month. However, if you get paid biweekly (every other week), you actually have two months out of the year when you get three paychecks.

Know your spouse's monthly take-home pay. If your spouse or partner also is responsible for paying bills, include their income as well.

Evaluate what percentage of your income is dedicated to paying off consumer debt. Multiply your monthly income by 0.15 (for 15 percent) and 0.20 (for 20 percent).

Monthly Income X 0.15 = __________

Monthly Income X 0.20 = __________

For example, if you earn $2,666 a month in take-home pay, you can put between $400 (15 percent) and $533 (20 percent) each month toward paying non-housing debt.

What Is Your Debt Zone?

Debt payments less than 15 percent: Increase the payments you make so you can pay off your debts sooner.

Debt payments between 15 and 20 percent: Look to save money in other areas and apply this money to pay down your debt.

Debt payments over 20 percent: Take immediate, substantial action to reduce debt payments: Reduce spending in other areas, increase your income by taking a second job, or have your spouse or partner take a job or second job, and sell items.