Debt Income Ratios and Debt Management

Debt income ratios - Learn how you can use them to manage and reduce your debt.

To start - What are debt income ratios? It is a ratio comparing how much money you owe, or how much debt you have, compared to how much money you earn from income. The ratio was made to determine a person's overall financial health and can be a useful tool. Basically, the lower you income to debt ratio, the more money you have to save and the better your overall financial well being.

So how do you determine your income to debt ratio? Debt income ratios are calculated by taking the amount needed to repay debt each month (rent, mortgage, car loan, credit cards, etc.) and dividing it by your take-home pay (net pay after taxes).

Example:

Monthly Debt = $2000
Take Home Pay = $3000

$2000/$3000= 0.67

Debt Ratio = 67%

Most financial institutions that loan money, like for people to have no more than 20% of their income pay for your outstanding debt, not including your mortgage or rent. If you include your rent or mortgage, they like that number to be around 40% of you montly take-home pay.

Calculating Your Debt Income Ratios

First you should make a budget of all the things you spend on things such as:

Credit card payments

mortgage or rent

car loan

student loans

personal loans

You can then enter this into the equation above.

You should also make a budget of all the things you spend money on, clothes, food, entertainment, gas, utilities, car matainence, medical bills, etc. By knowing what you spend your money on, you will be better able to target debt and reduce your debt income ratios.

Getting Out of Debt with Debt Income Ratios

Now that you know your income to debt ratio, how can you use it to save money and reduce debt?

Target debts for faster payout. Target the biggest debts first, as they have the most impact on your ratio.

If your basic ratio without your mortgage is why your ratio is high, you could try refinancing your mortgage, or consolidating debt into a home equity line to pay off all debt with one east payment.

Review your budget. Look for areas where you can reduce spending. The money you can cut from your budget, the more money you'll have to tackle you existing debt.

By tracking your spending, your will be able to take control of your financial future and start paying off debt more quickly. Tracking what we spend often makes us aware of all the little extras we waste money on every month. Reducing your budget by even $50-$100 a month will help you secure a healthier financial future.

To start working with some of our money saving tips, click on one of the links below.