What Is Your Debt-To-Income Ratio?

If you don’t know the answer to this question, it’s time to get serious about your finances. A debt-to-income ratio is a key factor in your budgeting methods and if you are not clear on how your money is spent or how much you actually bring home, you will never be able to resist the trappings of debt.

Calculating Your Ratio

To understand your debt-to-income ratio, you need to add up the total amount of your fixed monthly expenses. These will include all your debts such as mortgage/rent, credit card bills, car loans, child support, and any loan payments. You will not include expenses that are not ‘fixed’ such as grocery bills, utilities, or debts that are to be paid off in the next two months. Then take your total income amount and subtract your fixed expenses. If the sum is low or even in the negative, you are already in financial trouble. You can see you are barely making ends meet even without taking into consideration utilities, groceries, and emergency money.

Too Much Debt?
Typically, your goal ratio should be 36% or less, meaning that your total debt should not go over 36% of your income. If your monthly income is $3000, your debts should not be more than $1080 a month. By doing the calculation, you can figure out how close to debt trouble you are. Any debts greater than 36% also means your credit score will be negatively affected and lenders reviewing your information for a loan will look unfavorably on your application because you have too much debt. Of course, each lender’s guidelines differ and while one lender may be okay with approving application for people with 36% debt ratio, another lender may be looking for 20% or lower.

When to Get Help
If you do the math and figure out you are bordering on debt trouble, it would be wise to start analyzing your current budget. You may need to start cutting expenses in every category or you may want to consider sources of supplemental income such as a second job. Depending on what kind of budget plan you have, cutting back on monthly expenses may be all that it takes to get back on track.

For budgeting that never comes together, you may need professional help. Credit counseling agencies can help you sort through your spending and advise you on the next steps to take to get your debt under control. Third-party intervention may be necessary for people who are finding it hard to create and stick to a strict budget. For those who have no budget to speak of, the first step would be getting finances in order and establishing a reasonable budget that focuses on the elimination of debt.

Pride and fear are often the two main factors for people not getting help early. If you wait too long to get a handle on your debts, it can often be too late. Debt does not go away and ignoring it will only make the situation worse. Taking the time to take the first step – either creating a budget on your own or seeking debt assistance – as soon as you feel there is a problem (ie: can’t afford basic bills, can’t pay more than the minimum on credit cards) will allow you to take control of your debts rather than letting debts take control of you.