The current economy requires that just about everyone have at least some debt. Credit cards, student loans, car loans, mortgages, all require a certain amount of debt being incurred. But at what point do you cross the line and assume too much debt?
The answer to that question is very personal. Debt-to-income ratio is an equation that takes into account how much money you make prior to taxes being withdrawn. This is your gross income. For this amount you can take your base salary and divide by 12. If you receive bonuses or commissions from your employer, first consider how guaranteed those are and what increments they come in. For instance, if you earn a yearly bonus at work that can range between $5,000.00 and $20,000.00 it is probably best not to include a $20,000.00 bonus in your income because not only is that not guaranteed, should you receive it, it may not be that high. Be realistic, take your gross bonus or commissions, and divide them by 12. Add your base and commission/bonus income, this is your gross monthly income.
Now consider all of your outstanding debts. Include monthly payment amounts for anything that you owe, credit cards, student loans (even if they are deferred, it is still an owed debt), car loans, mortgages and home equity loans. If you care obligated to pay child support count this as well. Any deferred accounts such as furniture store or department stores that require no payments for 12 months, include those as well. What would your monthly payments be for all of these?
Once you have arrived at these totals, take the debt and divide it by the income. If you use a calculator, you should receive number that starts with a decimal, such as .35. This is your debt-to-income ratio. Now that you have calculated it, how high is the percentage? If it is 36 percent or less, congratulations –you are within the ideal of ratios! If you’re above 36 percent, do not panic. You have more than the ideal amount of debt and may want to consider whether getting any new debt would be a good idea. Recalculate your ratio but swap out numbers for the debt. How much debt should you eliminate to get that ratio down? This will give you a goal for your financial planning. Create a goal and lower some of that debt. Use a loan calculator to easily calculate and track your progress.