Debt Income Ratios Explained
Learning how to use Ratios in debt management.
Debt to income ratios compare how much you
owe with how much you earn. They provide a basic idea of your financial health.
The lower your ratios, the more you have to save or spend on other things.
Your ratios are the percent of your monthly take-home pay that goes to paying
debts. You calculate it like this: Take the amount needed to repay debts each
month, including rent or mortgage, and divide by your take-home pay (your net
pay after taxes). Remember, this is “Debt" ratio, so only include actual debt
repayment in the calculation, unless otherwise noted.
Example: Monthly debt repayment $1,000
divided by
Monthly take-home pay $2,500
= Debt ratio 40%
Financial and banking experts recommend that no more than 20% of your monthly
take-home pay (excluding rent or mortgage) should be used to pay debts and make
loan payments. And, no more than 40% of your monthly take-home pay should go
to paying all debts, including your mortgage payment.
Calculate Your Debt To Income Ratio
Download our free printable budgeting worksheets
and use them to calculate your debt to income ratio. These free worksheets contain
financial formulas in step-by-step outline to easily help you determine how
you stand.
Using Debt To Income Ratios To Get Out Of Debt
Obviously, your primary goal is to get out of debt. We suggest your secondary
goal be to minimize the damage to your credit while getting out of debt. By
using DIR to manage your budget, you can get out of debt and also minimize the
damage to your credit.
- You can target those debts for faster payoff that have the biggest impact
on your debt income ratios,
- If your Basic DI Ratio (without your mortgage), is the reason your DI
Ratios are out of line, consider refinancing your mortgage, or a home equity
loan, to get your ratio back in line with recommended percentages.
- Review your budget for areas you can reduce spending, then apply the saved
amounts toward debt reduction.
You can target the sections of your budget which are excessive when compared
to recommended budgeting guidelines. This will bring your finances into line
quickly, and your ratios will improve at the same time.
Tracking your daily spending will help you to reduce debt faster. How? By making
you more aware of where your money goes! Unconscious spending can kill a budget
faster than anything.

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Debt Income Ratios Explained
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Learning how to use Debt Income Ratios in debt
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