Know Your Debt-To-Income Ratio
September 22, 2009
Not all debt is bad debt. A mortgage, student loan, or even a home-equity loan are considered good debt, because they create value.
To calculate your debt-to-income ratio, follow these steps:
- How much do you pay each month in bills-mortgage, credit cards, etc? Come up with a total for all bills, excluding utilities and taxes.
- What is your monthly income? Be sure to include investments and child support.
- Divide your monthly payments by your monthly income.
What does it all mean? What is a good debt-to-income ratio?
36% or less – This is the target area we should all aim for
37% – 42% – You need to start paying off some debt before it gets out of control
43% – 49% – The danger zone – a high DTI ratio. Immediate action is needed to pay down debt
Above 50% – A professional financial advisor can help get you back on track to reduce debt
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