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. Here you will learn how to use them in debt management.
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.
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
Monthly take-home pay $2,500
= Debt ratio 40%
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. Or, do it online with our free online debt to income ratio calculator.
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. Take action to get debt relief, whether it is using this debt guide, or the products and tools available.