Debt is the money borrowed with the intention of repaying with interest. When you can’t pay your debt, you can be sure to be in trouble in many cases. Debt management is, therefore, very necessary. Basic finance handling strategies can help you take better care of your money and expenses for a lifetime.
If you have accumulated debt over time, you will need debt counseling to free yourself from the financial trouble you are in. Following are some of the things to look out for that suggest that you have an accumulated debt:
- You have little to no monthly savings.
- You pay for food and gas and other basic necessities using a credit card because you are left with very little money after paying your bill.
- You pay for a credit card using the cash advance you get from another.
- You get a lot of calls from lenders.
- You fear that you won’t be able to make the minimum required monthly payments on your debt.
What is a Debt to Income Ratio?
Debt to Income (DTI) Ratio is a number calculated by dividing your monthly payments on the debt by your monthly income. You can assess your debt situation by calculating the debt to income ratio. When you are looking to get more debt, debt to income ratio is basically what lenders will use to assess your ability to repay the money that you are borrowing and manage repayments every month.
How Can You Calculate Your Debt To Income Ratio?
The calculation of the debt to income ratio is pretty simple and can be completed in three steps.
Step 1: Calculate the total minimum monthly payments on your debts
While figuring out the total amount you need to pay each month on your debts, take account of all your recurring debts, such as:
- Mortgage or rent
- Home equity loan payments
- Auto loans
- Student loans
- Furniture loans
- Minimum payments on credit cards
- Child support payments or alimony
- Any other debt
Exclude your basic expenses like gas, food, and utilities from the list.
Step 2: Calculate the total monthly income of your household
At this step, you simply have to add up all the money you receive each month. The money may include:
- Gross income (excluding taxes and deductions)
- Alimony
- Child support
- Bonuses or overtime
- Other income
Step 3: Finally, calculate your DTI ratio
Debt to income ratio can finally be calculated by dividing the total amount of monthly payments on your debts with your gross monthly household income and expressing it as a percentage.
For example, if the total monthly debt payments are $1800 and the monthly income is $3900, your DTI ratio will be 1800 divided by 3900, which is 0.46 or 46%.
How much is a healthy DTI ratio?
A debt to income ratio of 36% or less is considered healthy, meaning you can easily settle your monthly debts. However, you should avoid acquiring more debt.
If that number exceeds 43%, you should consider yourself in trouble. And you must seek professional help if your debt to income ratio is more than 50%. Legal financial advisors can help you come out of that financial crisis.
