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How (and why) to Calculate Your Debt-to-Asset Ratio
by
JG Wentworth
•
July 23, 2024
•
8 min
In the world of money management, there are all sorts of fancy ratios and calculations that provide clues into your overall financial fitness. One such metric that frequently gets tossed around is the debt-to-asset ratio. It’s a way to cut through the noise and get a clear snapshot of how leveraged you might be.
But what exactly is this ubiquitous debt-to-asset ratio? How do you go about calculating it for your own situation? And perhaps most importantly, why should you even care about keeping tabs on it? Let’s dive in and demystify this powerful personal finance diagnostic.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
Debt-to-asset ratio explained
The debt-to-asset ratio is essentially a measure of how much you owe compared to how much you actually own. It demonstrates what percentage of your total wealth is already technically spoken for by outstanding debts needing to be repaid.
How to calculate it
To calculate your debt-to-asset ratio, you’ll first need to separately tally up two key numbers:
- The total value of assets you possess: This includes things like cash and cash equivalents, investment/retirement accounts, the market value of your home and vehicles, valuables like art or jewelry, etc. Essentially anything you own that could be sold off for cash.
- The total outstanding debts you currently owe: This covers the remaining balances on any loans, credit cards, student debt, mortgages, unpaid bills, and any other debts or payment obligations you’re carrying.
Once you have those two totals, the calculation is straightforward:
- Debt-to-Asset Ratio = Total Debts / Total Assets: Let’s say for example your total assets added up to $500,000, including home equity, retirement accounts, etc. And your total outstanding debts tallied to $150,000 between a mortgage, auto loans, and credit cards.
- Plugging those numbers in: $150,000 / $500,000 = 0.3
- This means your debt-to-asset ratio would be 0.3, or 30%: Generally speaking, the lower your debt-to-asset ratio, the better financial standing you’re in.
Most experts recommend keeping your debt-to-asset ratio below 0.4 or 40% to illustrate you’re not overly leveraged with debt compared to your wealth. A ratio over 0.6 or 60% could start raising red flags about accumulating too many debts relative to assets owned.
Why bother?
So why put in the effort to calculate this debt-to-asset ratio? There are a number of key reasons it’s a valuable benchmark:
- Assessing creditworthiness: Lenders like banks and mortgage companies will often look at debt-to-asset ratios when evaluating potential borrowers for new loans or credit products. It helps them gauge debt load manageability.
- Estate planning: The debt-to-asset ratio quickly illuminates big picture insights into an estate’s total value after subtracting liabilities. This informs strategies for transferring assets most efficiently.
- Ability to withstand surprises: A high debt-to-asset ratio could signify being overextended, making it difficult to absorb sudden expenses or financial shocks. Lower ratios enhance flexibility.
- Net worth tracking: For those focused on building long-term wealth, monitoring the debt-to-asset ratio over time shows the pace of decreasing obligations versus growing assets and net worth.
- Bankruptcy indicators: When debt-to-asset ratios become excessively high, it could suggest the need to explore debt relief options like negotiated settlements or even bankruptcy protection.
Need to improve your ratio?
If your debt-to-asset ratio reveals a concerning trend, you might want to consider debt relief. At JG Wentworth, we’ve helped countless individuals resolve their debt through our Debt Relief Program.* In fact, if you have $10,000 or more in unsecured debt, there’s a good chance you’ll qualify and get the JGW advantage:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- 24/7 support
- We only get paid if we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side, helping you to avoid having to deal with pesky collectors?
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The bottom line
At the end of the day, calculating your debt-to-asset ratio helps tilt the mirror slightly to reveal a more transparent reflection of your overall money situation. It provides a snapshot into how much you actually possess versus how much you still owe.
From that high-level view, you can then make more informed choices about paying down debts, acquiring new assets, or making other financial course corrections. A little calculation can give you a big advantage when it comes to planning your financial life.
About the author
* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
JG Wentworth does not pay or assume any debts or provide legal, financial, tax advice, or credit repair services. You should consult with independent professionals for such advice or services. Please consult with a bankruptcy attorney for information on bankruptcy.
