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Are you sitting on a debt time bomb? Find out...

by , 03 June 2013

Let's face it…We've all got debt. But the problem is, we don't know how much is enough! And nowadays the banks are offering juicy loans to pretty much anyone without even doing a proper background check. It's no wonder we're facing an unsecured lending crisis in South Africa! You see, most people don't realise, just because you qualify for a loan doesn't mean you should take one.

After all if you don’t watch out your debts could turn into a time bomb – blowing your financial well-being out of the water.
But don’t worry, with my debt time-bomb calculator you’ll know when you can take on more debt or if you should cut down on the current debt you have…

The debt that keeps on taking
I know of someone who took out a small loan of R3,000. Unfortunately, an unforeseen issue with his car came up and he was struggling to make payments to this loan.
And although this R3,000 may seem like it wouldn’t hurt him financially, this small sum turned into a devilish R11,000 in a matter of a months!
He was then forced into payments thanks to a garnishing order. Then, after all the legal fees that came with it, this once small debt snowballed into a massive fee of R15,000! To make matters worse, this was just one of several loans the SAME bank gave to the person. 
Clearly something is wrong in this country when it comes to debt. 
Unsecured lenders are handing out loans to people that are already in financial trouble. They then charge astronomical interest rates when they know people can’t cough the money up!
This kind of thing burns me to the core. That’s why it’s critical you’re able to calculate if you can afford more debt.
And, using my simple calculation, it’s easier then ever. 

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The ultimate debt time bomb calculator 
A great way to size up your debt load is to calculate how much debt you have relative to your income.
Banks should do this, but it’s pretty clear that they can’t always be trusted to do so.
Before you make these calculations, you should ignore for now, things that I consider to be ‘good’ debt. What I consider ‘good’ debt to be, are loans that you owe for real estate, a business and education.
They’re considered to be ‘good’ because they’re some form of investment that will positively impact your life. For instance, although you may have a massive debt on your home, the house will still appreciate in value in the future.
The thing is, these kinds of asset can actually make money if you were to sell them. In other words they’re less of a burden because they retain most of their value should you need to sell them for whatever reason.
So you must focus on what I call ‘bad’ debt. The higher-interest stuff used to buy things that generally depreciate in value. Things like cars.
The formula for this calculation is as follows:
‘Bad Debt’ ÷ Annual Income = Debt Time Bomb Ratio
Let’s say you earn R200,000 per year. After considering all your ‘bad’ debts between your credit cards and the loan on your car, your ‘bad’ debts come to R80,000. This would mean your Debt Time Bomb Ratio is 40%.
The lower this percentage the better. To make it simple for you I’ve made this table so that you’ll know what you should do depending the answer you calculated:
Percentage range What you should do
0-10% This is outstanding. You’re able to take out further loans.
10-25% This is mild. You can borrow more but be wary not to go overboard.
25-50% You’re in the danger zone. Do what you can to not take on more debt.
50% and above You’re at an extremely risky level. Start cutting down your debts.
Generally, when you hit the 25% mark it’s dangerous… Because if you have one small financial mishap, the debt collectors could come knocking at your door soon after.
Easy  to calculate right? 
Now all you need to do is make the quick calculation and decide for yourself what you should do!
To find out ways to cut down your debt click here.

Are you sitting on a debt time bomb? Find out...
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