Jakarta, CNBC Indonesia – In the middle of your home ownership credit (KPR) installments, you may think that you need a vehicle to support your daily activities. Is this the right thing to do?

Talking about personal financial health, debt is an area that must be paid attention to because with debt, your wealth and income can be eroded because of this obligation.

The larger the debt installments, the less money you can save or invest each month. Apart from that, the greater your debt, the smaller your net worth because the formula for net worth is total assets minus total debt.

To answer questions about the ideal limit for the amount of debt, know the following things.

Ratio of debt installments to income

You may often hear financial advice that says that the maximum safe installment is 30% of your income. The 30% value is the ratio of debt to income.

When your installments exceed 30% of your income, you will have difficulty meeting your daily needs, saving and investing.

It is worth noting that the 30% value itself is the value of the “entire debt bill.”

For example, you have a mortgage installment equal to 20% of your income, and you intend to take out a new car loan. You must ensure that your new car installments do not exceed 10% of your income.

Debt to asset ratio

It’s possible that your debt installments are still within reasonable limits, but not your total debt.

To find out whether our debt is too big or not, you can use the debt to assets ratio. This ratio value will measure the amount of unpaid debt, compared to the total assets we own.

The formula to find the value of this ratio is:

Total Debt x 100%

Total Assets

The maximum value of this ratio is 50%.

If your ratio value is above 50%, then you should be alert because the total value of your debt is more than half of your total assets.

Just imagine what would happen if you lost your income and you still had to pay off those debts? Your total assets will decrease drastically because you have to sell them to pay off these debts.

And if most of your debt is consumer debt, then this is also quite dangerous because consumer debt will only erode your wealth.

The smaller the better

Regarding ratios related to debt, know that the smaller the value of the ratio, the healthier your finances are.

Or, you can also set a target in the future to make this ratio value zero.

Carry out regular financial health checks to evaluate the amount of our debt. And improve our finances slowly while reducing our bad consumption habits.

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(aak/aak)