Debt to
Income Ratio
Your debttoincome ratio is simply
comparing what you earn against what you spend, and using this
to track your financial habits. This ratio is a great ways to
determine if you have too much debt or if you are heading
toward financial issues. It is used to determine
your credit worthiness. Here is how you calculate your
debt to income ratio.
Things Youâ€™ll
Need: calculator
Step 1  To determine your debt to income
ratio, we are going to use an equation that looks something
like this: (TOTAL MONTHLY DEBT) divided by (TOTAL MONTHLY
INCOME) = (YOUR DEBT TO INCOME RATIO)*(100) What this means is
that we want to figure out the debt to income ratio as a
percentage. So in this equation we divide your total monthly
debt by your total monthly income to come up with your debt to
income ratio.
Step 2  On a piece of paper or in Microsoft
Excel  make a column that shows all of your monthly debt
obligations and the cost per month for each debt. Identifying
where all of your money goes so that you can track it is the
biggest step. If you make a monthly payment on anything,
include it! Examples of things to include in this column are as
follows: monthly credit card bills, monthly loan payments,
mortgage payments, or home equity line payments monthly
insurance payments monthly rent payments, monthly car and
vehicle payments, monthly school loans, average utility costs
per month, average grocery costs per month, average gas costs
per month. Monthly revolving credit payments (furniture,
appliance loans, etc.) Other monthly loan amounts Monthly child
support payments, etc.
Step 3  After you have identified all of your
monthly debts and added up the total for each payment each
month, we are going to add this into our equation from Step 1
in the "TOTAL MONTHLY DEBT" area of the equation. (TOTAL
MONTHLY DEBT) divided by (TOTAL MONTHLY INCOME) = (YOUR DEBT TO
INCOME RATIO)*(100) For Example  lets assume that I have done
step 1 and 2 and my total monthly debt equals $2,500 for all of
my monthly payments. My equation would look like this: ($2,500)
divided by (TOTAL MONTHLY INCOME) = (YOUR DEBT TO INCOME
RATIO)*(100)
Step 4  Next we have to figure out our total
monthly income. Make another column on your piece of paper or
in Microsoft excel and write down all of the monthly income
that you make. We are looking to calculate your total net
income so that would be all takehome money after taxes, health
insurance, etc, that you receive. If you work in sales and your
income varies, figure out the monthly average for the past two
years as a baseline. Examples of your monthly income would be
as follows: monthly wages and any overtime, commissions or
bonuses that are guaranteed, rental or income property
payments, payments from loans you have lended out, monthly
utility credits if applicable, alimony payments received.
Step 5  Take all of your income and add it
up. We are going to add this into our equation from Step 1 in
the "TOTAL MONTHLY INCOME" area of the equation. (TOTAL MONTHLY
DEBT) divided by (TOTAL MONTHLY INCOME) = YOUR DEBT TO INCOME
RATIO For Example  lets assume that I have done step 1, 2, 3,
and 4 and added up my total monthly income. Lets say that it
equals $5,300 for all of my monthly payments received. My
equation would look like this: ($2,500) divided by ($5,300) =
(YOUR DEBT TO INCOME RATIO)*(100)
Step 6  We need to divide the number we got
for our total monthly debt by the number we got for our total
monthly income. The equation would now look like this:
$2,500/$5,300 = (0.472)*(100) Your equation will probably look
different, and if you want to see how I got the 0.472 try my
equation first. Use your calculator and divide 2,500 by 5,300.
You should get a number equal to 0.472.
Step 7  What does your Debt to Income
Ratio number mean? The lower the number you have, the better.
Your Debt to income ratio is used to score you on a financial
risk table and affects loans you are eligible for, payment
plans you are eligible for, and also helps to analyze how well
you can afford to save or pay people back. If your ratio is
higher than 0.36 or 36%  then you need to start reducing your
debt because you are seen as a financial risk in the credit
industry. Any score higher than 36 or 0.36 may cause an
increase in the interest rate or the down payment on any loan
you apply for. You are also spending more than you can
comfortably afford and you do not have enough money to save for
the long term of for emergencies. So now that you know this
ratio, start playing with ideas to reduce your debt to help you
decrease your debt to income ratio.
