If your debts are more than your monthly income, you will only be digging yourself into a deeper hole when spending your money over the festive season, according to Carla Oberholzer, DebtSafe spokesperson and debt advisor.
Oberholzer said that she would encourage people to calculate their debt-to-income ratio before they spend money they have not budgeted for or do not have.
“When it comes to keeping those money situations under control, proper debt management is now more crucial than ever,” Oberholzer said.
Debt-to-income ratio
The debt-to-income ratio, also known as DTI, is an important aspect of managing debt.
The DTI compares a person’s monthly income amount (gross – before deductions) to how much they owe (the total amount of their monthly debt obligations such as rent or loans).
How to calculate the debt-to-income ratio:
– (+) Add up monthly debts.
– (÷) Divide the total debt amount by income before any deductions (gross salary amount) and then (x) multiply it by 100.
– (=) The final percentage (%) determines the debt-to-income ratio.
The different debt-to-income ratio categories
According to Oberholzer, a low debt-to-income ratio establishes a favourable balance between debt and income while a high percentage indicates a riskier situation.
0-20% debt-to-income ratio
Your debt, compared to your income is considered good, therefore you can continue to maintain your current financial situation.
Should you choose to shop this festive season, keep the following in mind:
– Do your research
– Ensure that what you are buying is the best deal.
– Make sure there is room in your budget.
– Is the item a need or a want?
0-40% debt-to-income ratio
Your debt amount compared to your income demonstrates a moderate financial position, therefore you should consider making small budget/lifestyle adjustments to decrease your overall debt amount.
41-60% debt-to-income ratio
This category shows that you are moving into risky territory so you should consider making significant changes to lower your overall monthly debt amount.
“Partaking in any upcoming sale events or unplanned-for shopping sprees is not recommended,” Oberholzer said.
60%+ debt-to-income ratio
Falling into the 60+ percentage category is cause for concern and signals over-indebtedness. You should seek out a professional that can help you return to a better financial position.
Oberholzer said, “Taking part in any Black Friday, Cyber Monday, Tech Tuesday, or Black November ‘sale-of-the-year’ buys is a definite no-no.
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