Do you know how much debt you hold? Keeping your debt at a manageable level is one of the foundations of financial wellbeing. If you’re holding too much debt in relation to your income, it can be a sign of future financial troubles.
There is a way for you to estimate if you have too much debt by calculating your debt-to-income ratio.
Calculate your Debt-to-Income Ratio
If you’ve added all your income before taxes, you can then divide your total debt to your income to calculate your debt-to-income ratio (or DTI). Your DTI ratio is used by lenders to determine your ability to pay existing debt and if your income can handle another monthly payment.
Additionally, knowing your DTI can help you understand the potential risk you’re taking when applying for a new loan.
- Step 1: Add your monthly bills (rent or mortgage payments; alimony; child support; student, auto, or other fixed monthly payments; credit card minimum monthly payments; other debts)
- Step 2: Divide the total of your monthly payments by your monthly gross income (income before taxes).
- Step 3: The result is a percentage called your DTI ratio. The lower your DTI the less risky to lenders.
Want to lower your DTI? Increase your income or pay off debts to reduce monthly payments.