September 14, 2022
Are your finances feeling tight? It may be because your debt has outpaced your income.
Your debt-to-income ratio is a key factor in determining your financial health. This ratio is simply your monthly debt payments divided by your monthly income, multiplied by 100 to make it a percentage.
Banks and other lenders will look at your debt-to-income ratio when considering whether to give you a loan. They want to see that you have enough income to cover your monthly debt obligations. A high debt-to-income ratio can make it difficult to qualify for new loans or lines of credit since it can signal that you’re struggling to keep up with your debt payments.
Fortunately, your ratio is easy to calculate…
First, add up all of your monthly debt payments. This includes your mortgage or rent, car payment, student loans, credit card payments, and any other debts you may have.
Next, calculate your monthly income. This is typically your take-home pay after taxes and other deductions. If you’re self-employed, it may be your net income after business expenses.
Finally, divide your monthly debt payments by your monthly income. Multiply this number by 100 to get your debt-to-income ratio.
For example, let’s say you have a monthly mortgage payment of $1,000 and a monthly car payment of $300. You also have $200 in student loan payments and $150 in credit card payments. Your monthly income is $3,000.
Your debt-to-income ratio would be (1,000 + 300 + 200 + 150) / 3,000 = .55 or 55%.
A debt-to-income ratio of less than 36% is typically considered ideal by lenders—anything more can signal financial stress.¹
If your debt-to-income ratio is high, don’t despair. There are steps you can take to improve it.
First, try to increase your income. That can mean working extra hours, scoring a raise, finding a new job, or even starting a side business.
Second, you can lower your debt. You can do this by making extra payments on your debts each month or by consolidating your debts into a single loan with a lower interest rate.
Making these changes can be difficult, but they can make a big difference in your debt-to-income ratio—and your financial health.
If you’re not sure where to start, contact me! I can help you develop a plan to get your debt under control and to start building wealth.