"It's not denial. I'm just selective about the reality I accept." -- cartoonist Bill Watterson
People in debt often fool themselves about how bad things really are. They think they can afford their obligations if they're able to swing the minimum payments. Or they assume their credit card bills are about average, when in fact they owe way more than the norm.
Many carry these illusions to the brink of disaster, realizing only too late how deep a hole they've dug for themselves.
Even if the truth won't set you free immediately, it should give you the motivation to stop digging and start paying off your debt -- or to get help if you're really in over your head.
To that end, here are four money ratios you should figure out so you really know where you stand.
Leverage ratio
Leverage ratios, which measure total debt against total assets, are used in investing to evaluate relative riskiness. The higher a company's leverage ratio, the riskier that company is as an investment.The same holds true for household finances.
- All mortgages and home equity borrowing.
- Student loans.
- Vehicle loans.
- Personal loans.
- Other installment loans.
- Credit card debt.
- Other lines of credit.
- Payday loans, title loans, pawnshop loans and bounced-check fees owed to banks.
For assets, count the current value of your:
- Real estate (use Realtor.com or a similar service for a rough estimate).
- Vehicles (use Kelley Blue Book on MSN Autos or similar service for an estimate).
- Retirement accounts.
- Other investment accounts.
- Bank and credit union accounts.
- Life insurance (if the policy has a cash value).
- Net business equity, if you own a business.
- Other assets (gold, jewelry, collections or antiques).
Divide your debt by your assets to get your leverage ratio. For example, if your assets total $190,000 and your debts total $60,000, your ratio is 31.6%. Then compare your ratio with that of your peers:
| Leverage ratio | |||
|---|---|---|---|
By age of head of household | By household income | ||
Under 35 | 44.3% | Less than $20,600 | 13.5% |
35-44 | 28.2% | $20,600 to $36,499 | 18.5% |
45-54 | 16.3% | $36,500 to $59,599 | 24.3% |
55-64 | 10.3% | $59,600 to $98,199 | 25.3% |
65-74 | 6.5% | $98,200 to $140,899 | 23.4% |
75 and up | 2.2% | $140,900 and up | 8.4% |
All households | 14.9% |
Source for all charts: Federal Reserve's Survey of Consumer Finances, 2007.
Ideally, your leverage ratio will be lower than the average for your age and income and decline over time. If your ratio is high, you need to take a look at how affordable your debt is and what makes up that debt. Read on.
Continued: Debt-to-income ratio