What is a healthy Debt Asset Ratio, and how do you achieve one?
We all work hard for our money, so we can afford the life we want to lead. But in the midst of managing the demands of everyday life, we can forget to check in on our financial health.
As illuminating as it is, not everyone has the time nor disposition to sit down with a professional for a frank discussion on how things are, and where they’re likely to go if left unchecked.
Well, one quick and easy way to get a snapshot of your financial health is by checking your Debt Asset Ratio.
What is Debt Asset Ratio?
Debt Asset Ratio is a commonly used financial marker that is used to describe the financial status of an entity. It may take the form of a number or a percentage.
When referring to a company, Debt Asset Ratio and Debt Equity Ratio describes the company’s debt compared to asset or value of shares (equity) respectively.
For individuals, Debt Asset Ratio or Debt Income Ratio have essentially the same meaning, and may be used interchangeably.
Simply put, the Debt Asset Ratio is a measure of debt versus assets or income. There are important implications, depending on how high the figure is.
ALSO READ: 2 strategies to consider when clearing crushing debt in Singapore
How to calculate your Debt Asset Ratio
Step 1: Work out how much you are paying in debt repayment per month
This is a total of your unsecured debts such as credit cards, personal loans and credit lines, as well as outstanding loans such as student loans. If you have a mortgage that you are paying in cash (and not via CPF) add that in as well.
Step 2: Divide monthly debt total by your monthly income
This is your take home pay, after CPF, plus any regular income, say from side gigs, or investment dividends.
Step 3: Multiply that number by 100
This is to derive a percentage for your debt asset ratio.
Here’s a worked example on how to find your Debt Asset Ratio:
Total monthly debt
Total monthly income
Debt Asset Ratio as per cent
$1,200
$4,000
30
Calculation: 1200/4000 x 100 = 30
ALSO READ: Why it’s so important to clear your credit card debt during Covid-19
Why we do not use gross salary?
In calculating your Debt Asset Ratio, we use your net income (after CPF deductions) instead of your gross salary. This is because your CPF savings cannot be used to repay your debts, hence it should not be counted towards your total income or assets.
For the same reason, if you have a mortgage that is being paid via your CPF, you should exclude that amount from your total monthly debt to avoid skewing the ratio.
However, if your mortgage is paid in cash and not via CPF, then you have to add that into your total monthly debt for an accurate picture.
Why you need to know your Debt Asset Ratio
Your debt asset ratio tells you some important things, such as:
The probability of you getting a loan
The state of your cashflow
The likelihood of you being able to retire comfortably
1. The higher your Debt Asset Ratio, the lower your chances of getting a loan
If you have a high Debt Asset Ratio, it means a large portion of your income is going towards debt repayment.
Which leaves less to cover your other expenses.
Banks and other lenders read this as a risk of you defaulting on your debt repayments. Past a certain threshold, they may simply reject your loan application, as they deem the likelihood of you meeting your debt obligations low.
Therefore, if you’ve been trying and failing to get that renovation loan, try paying off some of your debts first. This will lower your Debt Asset Ratio, and increase your chances of having your loan application approved.
2. The more you are paying in debt, the weaker your cashflow is
In our example above, we have a Debt Asset Ratio of 30 per cent ($1,200) on a net income of $4,000, leaving only $2,800 to meet our other expenses. You can imagine this doesn’t leave much for other expenses outside of our daily essentials like food, groceries, utilities and insurance.
Forget about starting or building up your emergency fund; that’ll have to wait till some other day, along with important things like investing for the future.
If you should encounter an emergency that costs a couple of thousand bucks, what happens then? You will need to dig into your savings (possibly wiping it out in the process) or have to take out a personal loan, or as a last resort, cover the cost with a credit card.
Now imagine if your Debt Asset Ratio was slashed by half to 15 per cent, leaving you with an extra $600 per month. Your cashflow would be much stronger, and you would be able to start tackling at least some of these crucial financial goals.
3. The longer your debt asset ratio remains high, the less likely you are able to retire comfortably (unless you’re already rich)
For the average salary person, the economic lifespan is limited to the number of years you can reliably earn an income. So the more of those years you spend with a high debt asset ratio, the less wealth you are able to retain for your own purposes, such as retirement.
Therefore, if your Debt Asset Ratio has been high for a prolonged period, and looks set to remain high, you are risking your ability to retire comfortably (or even at all).
You could check out this article of ours – done in collaboration with CPF – to learn exactly how much you’ll need to retire comfortably according to your choice of lifestyle.
What is a healthy Debt Asset Ratio?
Ideally, your Debt Asset Ratio should be 0 per cent. However, that would also leave no room for necessary and useful loans, which is impractical for those of us who don’t own a diamond mine. Hence, the real world requires a slightly more nuanced approach.
It is important to recognise that not all debt is bad or undesirable. Instead, we need to weigh debt against any potential improvements to our quality of life.
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For instance, instead of staying on in the cramped childhood apartment, buying your own property can provide you with a more suitable environment to start your own family. Also, your apartment turns into an asset once you pay up the mortgage.
Similarly, taking that long-awaited Masters can help you attain greater heights in your career, and buying a car can help you earn extra cash as a private-hire driver on the weekends.
All of these scenarios would likely involve taking a loan or a mortgage, and driving up your Debt Asset Ratio in the process. But in return, you’ll reap a host of benefits.
Hence, a healthy Debt Asset Ratio is ideally one that is as low as possible, but as long as you’re able to manage your finances comfortably, don’t be too afraid of taking on a little debt.
Tips for lowering your Debt Asset Ratio
Wipe The Debt Smoke Out—Your Debt‑Asset Ratio Treatment Plan
Ever look at your money situation and feel like your bank account’s doing a slow‑motion dance of doom? That’s the High Debt‑Asset Ratio blues. The good news? You can treat it like a stray roommate—no more invites, just the pay‑and‑leave rule. Below is a casual, slightly comic roadmap that’ll help you out‑score debt and give your bank balance a much‑needed boost.
1⃣ Dump the Extra Debt Like It’s TMI
- Top‑picks first: High‑interest debts. Dial them up first because they’re draining your future treasure faster than a sponge in a rainstorm.
- Snowball the rest. Throw whatever’s left in a slow‑but‑steady inflationary kick—pay the smallest balance first, then roll the extra cash into the next one. It’s the “roll, roll, roll” trick.
2⃣ Keep the Door Gently Closed on New Loans
- No auto‑loans for grocery delights. Think of it as moving from “I’ll buy that ramen on credit” to “I’ll stash a rice‑investment stash.”
- Emergency fund rule. Build a red‑banded safety net. If it catches you, your credit isn’t called on it.
3⃣ Boost Your Income—Like Gold‑Miners Are Invincible!
- Side hustle squad. Freelance gigs, online tutoring, or a barista job—any thing that pokes extra cash into your wallet.
- Skill‑upgrade hack. Learn a market‑in-demand skill—like coding, digital marketing, or even emoji mastery.
4⃣ Automate the Moo‑Moo Money Flow
- Automatic transfers to debt. Set the system so that each payday directly rushes to your debt before you even notice it’s gone.
- Use a budgeting app. Get real‑time alerts on overspending so you can slay those extra expenses before they turn into dragons.
5⃣ Celebrate Small WinsLike You’re in a Money‑mixing Concert
- When you pay off a balance, throw a happy dance. Small victories keep the motivation rolling.
- Monthly check‑in. Grab a fresh beverage, review numbers, and acknowledge how far you’ve come.
Armed with these simple, snappy steps—and a dash of humor—you’re well on your way to taming that High Debt‑Asset Ratio. Keep rolling, keep saving, and before long you’ll have the financial freedom you vowed to chase.
1. Consolidate your debt
Use a 0 per cent balance transfer to pay off your outstanding credit card balances, then focus on paying down your balance transfer within the interest-free period. This will help you shorten the period you’re holding on to debt.
If you’re unable to find a suitable balance transfer, try using a personal loan to consolidate your debt instead. Apply for the shortest tenure you can comfortably manage to get out of debt as quickly as possible.
2. Accelerate your debt repayment
If you have some cash leftover at the end of the month, it may be worthwhile to use it to pay off your debts quicker. Yes, your Debt Asset Ratio will go up while you’re doing this, but you’ll accelerate your repayment timeline. And over time, even $50 extra per month can make a substantial dent in your mountain of debt.
3. Pay off whatever you can right now
Quick Debt Cleanup Tips
Got a few credit cards with tiny balances or loans that are almost at the finish line? Now’s the perfect time to wipe them clean.
What to Look For
- Credit cards with low balances – only a handful of pennies left.
- Loans that have a few installments left – just a couple of payments away from being fully paid.
Why Pay Them All at Once?
If you’ve got the money sparking in your wallet, consider paying each of those debts in a single lump‑sum. This move gives you a nice little boost in your Debt‑Asset Ratio, which can open the door to better credit terms and a cleaner financial picture.
Heads‑Up: The Early‑Repayment Fee
Just a quick reminder: while killing those debts is great, some lenders might slap an early repayment fee on the loan. So, before you hand over the cash, double‑check your loan terms. It’s all about balancing the pros and cons.
Take that step, breathe a sigh of relief, and watch your debt ratio shrink—just watch out for those sneaky fees!
4. Increase your income
Scrimping and saving can only get you so far. Consider taking up a side gig for increased income that you can put into debt repayment, so you can spare yourself further hardship in the future.
This article was first published in SingSaver.com.sg.
MoneyPersonal financeasset management
