Consumer Debt Levels

• Consumer debt has three levels. Level one is normal household expenses, such as mortgage or rent, utilities, food and water. Each level builds on the previous level. Therefore, level two includes the first level plus car loan payments and insurance, home insurance and property taxes.
  
  Level three is paid with a portion of the remaining income. This includes store credit, major credit card payments, car loans, student loans and personal loans. It is the responsibility of the consumer to control and maintain "healthy" debt--debt that supports a reasonable credit history.
  
  

Consumer Debt

• Financial analysts calculate consumer debt in search of methods used to control level three debt. They are concerned with all non-mortgage-related installment payments. This includes outstanding balances on credit cards, car loans, personal and student loans.
  
  Income will service debt payments to the point of income availability and necessity. It is easy to determine if you have sufficient income to manage debt by calculating your consumer debt-to-income ratio.
  
  

Consumer Income Levels

• piggy bank image by Maria Bell from Fotolia.com
  
  A consumer can sleep well when the bills are paid, saving deposits are made and there is some money in the cookie jar for a rainy day. This reality eludes many of today's baby boomers born before 1960, who were raised in an atmosphere of plastic money. Credit and loans were inevitable, and bills would be paid by heirs to their estate.
  
  Your safety zone generally should include 10 percent of income placed in savings, 15 percent paid to service debt, 30 to 35 percent pays monthly household bills, 25 percent is available for expected--or unexpected--catastrophic expenses and the balance is cookie jar money.
  
  

Consumer Income

• Earned income is money from salaries, wages or services rendered by you. However, some income might be "unearned," coming from interest, dividends, inheritance or investment. Total monthly income might be a combination of earned and unearned money.
  
  Inflation devalues income, making it less likely to sustain your lifestyle. This means you need more income or less debt. The days when a dollar equaled one hundred pennies are gone. How you handle this reality is a personal matter.
  
  

Income-to-Debt Ratio

• You can determine your own ratio using one of two methods: 1) gut feelings or 2) simple math. Gut feeling kicks in when the monthly juggle begins. When you start to rotate your bill payments in order to get by, your gut feeling should say you are carrying excessive debt and under financial stress.
  
  If it becomes difficult to make your minimum monthly payments, you are in trouble. When you avoid answering the phone because you recognize the bill collector's phone number on your caller ID, you have too much debt and too little income.
  
  

Income vs Debt

• As soon as you develop an awareness of how the income-to-debt ratio works, you are in a better position to control your spending. Income-to-debt ratio is expressed as a percentage. Obtain this percentage by totaling all monthly level-three installment payments. Then, identify and total your consistent, dependable monthly net income.
  
  Divide monthly debt total by monthly net income to get your consumer debt-to-income ratio. Round the resulting decimal to three places, move the decimal point two places to the right and place a % sign after this number. If that number exceeds 15 to 20 percent, you are approaching dangerous territory. Over 20 percent means you will sink fast.