Your debt to income ratio is easily calculated. It is the percentage of your income that goes towards paying your debt.
This calculation is a good indicator of whether or not you are in a healthy financial state. Once you have figured out your debt to income ratio, you can examine your total financial picture to determine whether or not you need to make some changes or begin eliminating your debt more aggressively.
How Do You Calculate Your Debt to Income Ratio?
The first thing you need to do to calculate your debt to income ratio is to add up your monthly income. This means that you need to divide your yearly income by 12. Don't forget to add any other income you may be receiving such as child support or alimony.
After this, you should add up your total monthly debt costs. These can be anything from credit card minimums to rent to mortgage payments. Once you have your monthly income and monthly debt calculated, divide your monthly debt by your monthly income and then multiply that number by 100.
This will give you your income to debt ratio percentage.
How Do You Know if You have a Good Debt to Income Ratio?
Generally, a good debt to income ratio is anywhere near or below 30%.
This means you have enough income to pay your debts and still put money away. If you are higher than 40%, you may want to look into paying off some of your debt more aggressively.
If your debt to income ratio is over 50%, you may be entering dangerous territory. It might be wise to consult a credit counselor to see if there are smarter ways that you could be managing your debt.
Your debt to income ratio is an important number. It may help banks figure out if you are a good candidate for a loan. It also may be reflected in your credit score. Always be aware of your debt to income ratio so that you are on solid financial footing when it comes to making big decisions about your credit.
