Calculating Income To Debt Ratio

Obviously debt and income are two major factors when trying to tack your financial progress. Every one of us would like to be in the position where we have more income coming in than debt but for some of us this is simply not the case.

When looking at your income, how do you actually know how much is enough? You can use your debt to income ratio to tell you. Working out your debt to income ratio can be quite simple, but it has brilliant benefits. It’s ideal for helping you to analyse your financial situation and where it is going.

It’s simple

The debt to income ratio is the sort of calculation lenders do when evaluating your financial progress, it gives them a great snapshot of your finances. The debt to income ratio doesn’t by any means give you detailed financial advice but it gives you a great snapshot of where you’re at.

The best thing about calculating your debt to income ratio is that it’s very simple. It’s as easy as adding up all of your monthly debts and all of your monthly income, so that you can make one simple calculation. To make sure you get an accurate figure that you can rely on, you should make sure you are thorough and that you try to include everything in your calculations.

Evaluate

To make sure you are as thorough as possible when making your calculations, grab a pen and paper and go from A to Z, it might be easier if you have 6 months worth of bank statements to give you a bit of guidance. Remember to include things like loans, balance transfer credit cards, mortgage payments, car finance, child support and all other debt obligations. Remember to work this out on a monthly basis.

The next step is to calculate your monthly income, firstly take your monthly salary, and add to it any auxiliary income that you may have, whether it is from a website you own or from a side business, try to include everything.

Calculate

To work out your debt to income ratio merely take your total debt figure and divide it by your total monthly income, then times this amount by 100 to give you your percentage. Here’s an example; if your debt figure is $1000 a month, and your monthly income is $3000, your debt to income ratio is 33%.

Analyse

So what does this figure tell us? You ideally want your % ratio to be as low as possible, the lower the figure the less debt you have compared to your income on a month to month basis.

This then proves that you are financially better off and knowing this information can help you to analyse your financial situation, in a very similar way to that of a lender when deciding whether or not to lend you money.