If you’re paying off debt, you want to be aware of something called your debt to income ratio. The reason it’s good is because it provides an overall measure of your financial health.
What Is Your Debt to Income (DTI) Ratio?
Generally speaking, your debt to income ratio is pretty much what it sounds like: the ratio of debt you have divided by your gross monthly income.
How to Calculate Your DTI Ratio
It’s pretty easy to calculate your own DTI ratio, if you want to do the maths yourself:
“DTI ratio is a simple formula. Divide your monthly debt obligations divided by your gross monthly income, and multiply that number times 100,” says [Erin Lowry, author of Broke Millennial].
For example: Let’s say you pay $200 in loans, $850 on rent and $120 for your credit card. Your monthly gross income is $3500.
($200 + $850 + $120) ÷ ($3500) = 0.3342
Then, multiply this by 100 to get 33.42 per cent.
The “Ideal” DTI Ratio
Ideally, you want to keep your DTI at 36 per cent or less. Of course, you should aim for a DTI ratio of zero per cent if your goal is to be debt free.
Comments
One response to “Why Your Debt To Income Ratio Matters, And How To Find It”
With respect, this doesn’t say why your DTI matters. A DTI only says what percentage of your income you throw into debt, and doesn’t necessary reflect any stress in doing so.
I only have to pay about 30% of my income on debt, but voluntarily pay more like 40%. If I was earning another $1000 a month I could put that into repayments as well, have a DTI of 50% and still live comfortably.
The DTI for your obligations IS important, but not because it gives some vague measure of financial health. It identifies your financial risk. If you have a low DTI, you can absorb more debt, or higher repayments, and that’s where its important – can you absorb higher debt, or higher repayments?
But it doesn’t change that you only need a certain amount to live, and anything over that can go to debt or investments. That’s a better measure of financial health to me – how much disposable income do you have after debt repayments. For me, $500 a week is plenty.
For others, such as families or students, that number will be different.