Calculating your debt-to-income ratio (DTI) gives an idea of how much debt you have or how much your outgoings are compared to how much income you have coming in. It gives you an idea of your current financial situation at any given time and this ratio, among other factors, will decide if lenders agree to lend to you or not.
Most lenders ask for a detailed breakdown of how much your monthly income and expenses are every month as the resulting debt-to-income ratio determines if you are a high risk candidate or someone who can pay off an additional outgoing without becoming bankrupt.
To calculate this ratio write down a detailed breakdown of all the income that you earn every month. Do a pro rata total if you get paid weekly. Add to this any other income like bonuses or overtime or interest that you receive in addition to your salary. This will be your total gross income (income before tax) earned for that particular month.
Now make a list of all your outgoings every month excluding your mortgage payments and rent. Include credit card and store card payments, instalment payments on your car, furniture and other appliances and student loan repayments. The total gives you an idea of what your total monthly expenses are. Some companies include mortgage payments and rent into total expense outgoings to give a better overall picture of what is paid out every month.
Now divide the total of all your expenses by the total of all the income earned for that month and then multiply it by 100 to get a percentage figure.
This ratio should be 30% or less if you are paying off your debts comfortably and still have income left to pay off any additional repayments. If the ratio is 40% and above then listen to the warning bells and tighten your spending belt. Learn to manage your debt before it starts getting out of hand and becomes a real problem. Look for ways of increasing your existing income if possible or find ways for reducing the expenses that you pay out every month. Look for debt consolidation to bring down the credit card and other loan payments into one smaller manageable amount every month,
Doing regular checks on your debt-to-income ratio will keep your spending in check and keep you debt free. In addition a low debt-to-income ratio will also make it easier for you to obtain credit in the future and at a lower and a more competitive interest rate.