Did you know that it is possible to calculate your degree of indebtedness? That's right! In fact, having this information in hand is essential to know how much of your income is being used to pay debts.
This so-called degree of indebtedness is widely used in the business sphere, since, from it it is possible to measure the risks of the enterprise. Through it the manager can make more assertive decisions on cuts and investments.
However, measuring the degree of indebtedness is not a unique and exclusive resource of companies and fits perfectly in the personal sphere. Since, it contributes so that people can maintain their financial health in day.
In Brazil, almost half of UK citizens, 48%, have no control over their budget, revealed a survey by the National Confederation of Shopkeepers (CNDL) and the Credit Protection Service (SPC Brasil).
This lack of planning, in most cases, leads to financial uncontrolled and, consequently, to debts. To help you change this scenario, we will give you tips on how to calculate the degree of indebtedness and how to reduce it.
Interested in the theme? So, just go ahead with this content and get your financial control up to date.
What is degree of indebtedness?
The degree of indebtedness is a financial indicator that allows companies and people in general to measure their debts at the expense of their earnings. For companies it is important to calculate the organization's dependence on third party resources.
That is, companies that are unable to support themselves recipe and end up using loans, overdraft, credit card, etc. The greater the degree of indebtedness, the greater the risk of the company compromising its functioning.
Bringing it to the personal level, this indicator has the same objective and serves so that the person can have a clear view about their debts. It is through it that it is possible to assess risks in relation to their own finances.
Not only that, with this data in hand, it is easier to adopt strategies to improve financial health and bring it up to date.
What are debts?
When we talk about the degree of indebtedness, it is important to conceptualize the meaning of the word debt. In the dictionary, the word debt is described as:
- amount you have to pay someone.
- moral obligation contracted please and / or well received.
In other words, based on these meanings, we have debt as a debit balance. A commitment that you have made to someone, be it a bank, a friend, a financial officer or a family member.
There is a lot of talk about debt also about future commitments that will somehow compromise part of the earnings. Loans, post-dated checks, installment purchases on credit and store cards, and financing can be described as debt.
Expenses x debts
To separate debts from expenses, expenses are those expenses that permanently compromise the budget such as electricity bills, school, health insurance and rent.
The expenses are divided into fixed (condominium, rent, school) and variable (electricity bill, expenses with supermarket, leisure and food).
One survey of the National Trade Confederation (CNC) showed that UK residents families, 67.1% of them, are in debt. Debts with credit cards, banks or installments are among the biggest causes of indebtedness.
That is why it is so important to know the degree of indebtedness to prevent any debt from becoming a snowball and causing not only worries, but physical and mental illnesses.
In the article “Financial health vs. physical health: what are the impacts of this relationship?” we talk more about it, you can read it clicking here.
What are the debt figures in Brazil?
The indebtedness of UK residents families is higher each year in the country. This is mainly because a large part of them are not financially organized and ignore planning for unforeseen events.
The consequence is loans for the payment of bills and unnecessary installment purchases that will compromise earnings every month for a long time.
Many, in fact, end up defaulting due to the lack of payment with what they promised to pay at the time of purchase. In Brazil, according to the SPC Brazil, only 48% of people assume that they are financially organized.
26% point to indiscipline as the main cause of this financial disorganization. 19% say they do not remember cash purchases and another 8.2% say they do not have time to plan.
The consequence of this is that 47.2% of UK citizens have no idea how much they pay interest when they choose to install a purchase. Thus, they end up spending well beyond what was expected regarding the initial value of the product or loan.
The most alarming thing is that 17.4% are not even aware of the total value of their monthly bills and 60% have no idea how much they pay with interest, charges and fees throughout the year.
This is reflected in a high degree of indebtedness, with more than 67% of indebted families in the country and a default rate that reached 25.4%, according to CNC.
Changing this scenario requires financial balance and we will talk about how to reduce the degree of indebtedness next.
What tips to follow to reduce the degree of indebtedness?
Default is capable of causing insomnia, low self-esteem and even a drop in appetite, according to a Instituto Locomotiva research.
54.8 million of UK citizens say they lost sleep due to debts. Another 54.1 million have affected their self-esteem and 45.3 million have lost their appetite.
But how to avoid and reduce indebtedness so that it does not start to directly impact health? Below you can see some tips.
Change your money habits
Financial balance essentially requires a change in habits and to decrease the degree of indebtedness as well. Spending more than you receive is a recurring problem for UK residents families.
50% of them, according to a survey done by Kantar, you spend above your own earnings. The result of this is a high level of indebtedness and default as a consequence.
The first step in changing this is put your feet on the ground and live within your financial reality. Don't flaunt it! Don't spend more than you earn!
Evaluate the general expenses of your day, your week, your month and rethink the habits that may be compromising your finances.
Recognize your debts and change your behavior
Another important point to reduce indebtedness is to recognize the problem and take measures to stop the debts. Planning and reorganizing your family budget at this time is critical.
That means that you need to have all your expenses and debts at the tip of the pencil, in addition to the net amount you receive monthly. Today, for example, do you know how much of your salary is used to pay debts?
It is very important to have this answer on the tip of your tongue. Given that, only then will you be able to set priorities, choose which bills should be paid first and mainly organize yourself to have that money set aside for debts monthly.
Evaluate the highest interest rates and, if necessary, prioritize those that grow the fastest so that you do not become over-indebted quickly. It is suggested that you commit a maximum of 30% of your net earnings to pay off debts.
Renegotiate your debts
Many debts are negotiable. Once, many banks and financial institutions prefer to receive part of the value than to receive nothing.
So, a possible action to reduce the degree of indebtedness is the renegotiation of debts. Obviously the lender is under no obligation to accept this type of deal, but it is a possibility.
Serasa Consumer campaigns as “Feirão Serasa Limpa Nome” and “Settling your accounts”, Boa Vista SCPC, are good alternatives in which many companies offer discounts of up to 98% on debt renegotiation.
THE expenditure cut it is an integral part of those who want to update their financial health, in addition to being part of a plan to reduce the degree of indebtedness.
If you spend less consequently you will have more cash on hand and this will make it easier to pay your debts. And when it comes to cutting costs, it is eliminating what you will not miss in your daily life, which is not essential.
For example, a cell phone plan that you pay for, but don't even use the entire package; that streaming service that you haven't joined in months; that purchase from the market with expensive brands for simple luxury and lack of research and excessive spending on food outside the home or leisure.
Each cut, however small, in these areas, can make a considerable difference at the end of the month and who knows, it will be of extreme help for you to be able to honor your commitments and reduce your debts.
To complement the tips, check out the Nath Finance video and learn how to organize yourself financially with little money.
How to calculate the degree of indebtedness?
The degree of indebtedness is obtained through a formula that considers debts and net gains. That is, liabilities (debts) divided by assets (monthly income). The result is multiplied by 100 to have the percentage value.
We then have:
- Degree of indebtedness = Debts / Revenue x 100
Let's take a practical example. Let's assume that Diego has the following debts.
- Loan: £ 300.00
- Car installment: £ 250.00
- Credit card: £ 400.00
- Total debts: £ 950.00
Diego's monthly income is £ 3,000.00. Let's go to the accounts to find out how indebted they are (GE):
- Degree of indebtedness = Debts (£ 950) / Revenue (£ 3,000.00) x 100
- GE = 0.316 x 100
- GE = 31.6%
Diego, then, has a degree of indebtedness of 31.6%. This means that he has slightly exceeded the limit that is considered acceptable and needs to turn on the warning signal. We will talk about these degrees below and when to worry about them.
How to evaluate the numbers?
There are several evaluations in the sense of the result of the calculation that indicates the degree of indebtedness, what is acceptable and what exceeds the limits. The most common in the market considers the following numbers of degree of indebtedness:
- Degree of indebtedness up to 30%: Manageable debts and within the limit considered acceptable.
- between 30% to 35%: Warning signal on and the ideal is to try to reach the level below 30%.
- between 35% to 40%: Dangerous situation that requires an immediate change of habit so that debts do not cause default and leave the person over indebted.
- above 40%: Chaos slammed the door. Almost 50% of the monthly income is used to pay debts. It is in this degree that the person is already faced with “unpayable” debts, very high interest rates, defaults and compromises his entire financial situation. It is a real snowball of debt.
Decreasing indebtedness is a challenge
Decreasing the degree of indebtedness, as we have seen throughout this article, is not an easy task. On the other hand, it is even worse if the person ignores this problem and continues to spend beyond their means.
To guarantee the long-dreamed financial balance, even if you are momentarily in debt, it is necessary to be aware of the situation. Because, it is from there that it becomes possible to make assertive decisions in relation to their finances.
On that path, however, it is necessary to cut expenses, change habits, renegotiate debts and, above all, start honoring commitments. The worst thing to do is to ignore reality and let it turn into a snowball, with an “unpayable” debt.
So, review your finances today, measure your debt level and, above all, have the courage to change. Since that is the only way it will be possible to achieve financial health.