The debt ratio and the long-term debt coverage ratio can help you determine whether or not you can meet your current or long-term debt obligations.

Your debt ratio tells you whether you could pay off all your liabilities if you liquidated all your assets. This ratio is equal to your total liabilities divided by your total assets. This ratio represents the percentage of assets that are financed with borrowed money. Track this trend; this ratio should go down as you grow older.
 
Your long-term debt coverage ratio tells you how long you could continue to make payments on your long-term debt based on the amount of money you have for living expenses. To calculate this ratio, divide the amount you have available for living expenses, i.e., wages less taxes, by the amount of your long-term debt payments. The higher this ratio is, the better; a higher ratio indicates that you could cover your debt payments for a longer period of time. Track this trend; this ratio should go up over time.
 
In the example above, Bill and Suzy’s debt ratio is $4,200 divided by $11,950 or 35%. Roughly 35% of their assets are financed with borrowings, and most of that is with student loans. Once Bill and Suzy buy their first home this ratio will likely increase. A good goal is to make this ratio 0%, meaning you have paid off all your liabilities, including your mortgage.
 
Their long-term debt coverage ratio is calculated as the monthly amount of money available for living expenses (wages less taxes) divided by the monthly amount of long-term debt payments.  Their ratio is $2,650 divided by $50 or a ratio of 53.  They are doing very well.  Debt coverage ratios should be higher than 2.5.  Because they are renting this ratio is very high.
 
The inverse of this ratio is called the debt service ratio.  The debt service ratio is long-term debt payments divided by money available for monthly living expenses.  Ideally, this ratio should be very low and less than 40%.  In Bill and Suzy's case, their long-term debt payments are $50 divided by money available for monthly living expenses or $2,650.  Their ratio is 1.9%. Only 1.9% of their income goes to pay long-term debts.  Taking 1 divided by the long-term debt coverage ratio of 53 gives the same result.