Today I am going to be expanding a little on the topic of debt-to-income ratios. Why is this important you may ask? Knowing this ratio will come in handy if you are trying to answer the question highlighted in the title of this blog posting – “how do I know if my debts are manageable?”
As I dug a little deeper into this subject matter, I realized just how key this topic is to the success of my family’s day-to-day budgeting, as well as the direction of our future finances. Since my journey has began, I have gained more awareness with regards to how to manage and understand our financial situation – however I have yet to look more closely at this vital piece of the puzzle . . . the debt-to-income ratio (sounds fun, I know!)
From my perspective, my husband and I are managing our financial situation with a great deal of responsibility and continuous effort. We are always trying to keep our debt levels in check and we have come to understand more and more that it is realistic to assume that carry some level of debt is commonplace.
It then occurred to me that if we are to have some level of debt for the foreseeable future – I want to know for sure if the amount we currently carry is too much or if it is a realistic amount to manage, without leading too far into a financial crisis of sorts. With that said, I began to look into the concept of debt-to-income ratios and how much debt is acceptable and how much is categorized as TOO MUCH.
Understanding the Debt to Income Ratio
This financial term refers to the relationship between the level of gross income (i.e. before taxes), you are earning and the amount of money you have borrowed and still must pay back, including loans and credit card debt, as well taxes, fees, and insurance expenses.
Typically, this is an important value to pinpoint, as you prepare to obtain a large loan, for example a mortgage. This amount helps detail how much you can afford, when looking to purchase a new home and how likely you are to secure the loan amount you require.
After successfully getting that loan, it is also typical for many people to lose track of their debt-to-income ratio, because they believe they don’t need that information anymore or at least again for quite some time. However, it is actually a good idea to keep an eye on this value over time as it will inform you if you are at risk for going too far into debt. Thus, this is a great piece of information to have on hand at all times.
At this time, we are not in the market, for a new home, however, I believe that being aware of this percentage can only serve to strengthen our financial responsibility.
Next, was to determine how to find out where and how to calculate our debt-to-income ratio. In order to make sure our debt level was not tipping the scales, I turned to an online debt-to-income ratio calculator.
Online calculation tools are readily available on various sites and the Consolidation Credit Counseling Services of Canada platform, for example, offers an easy-to-use debt-income ratio calculator for your convenience.
Via this platform, you will be asked to type in information regarding your finances and after you have submitted these details, your debt-to-income ratio will be calculated for you. Additionally, you will be able to find out one way or the other if your debt falls within the manageable or unmanageable range.
This site walks you through a simple 3 step process and with the relevant information on hand, this process will not only be straightforward, but will also present you with your debt-to-income ratio within seconds.
The Information you will need to enter (if applicable), is as follows:
1) Income Section
• Your monthly income
• Spouse’s monthly income
• Additional income
2) Payment Section
• Mortgage/Rent Payments
• Utilities
• Car Payments
• Insurance Premiums
• Transportation Expenses
• Minimum Monthly Credit Card Payments
• Other Loan Payments
3) Results Section
The following information will be presented to you in these 3 categories:
• Total Income ____
• Total Debts ____
• Debt Ratio % ____
Here is what you will need to look for – if your debt ratio percentage is 50% or higher, this is considered an ‘unmanageable’ debt-to-income ratio. Further information also goes on to explain, that banks and lenders prefer that this ratio does not exceed 36%, and ideally be as low as even 20%.
This is just one of the online tools that exist to locate this useful information. You can search online for a site or company that offers a calculation format that suits your needs and one you find accessible. Taking the time, to learn more about your debt-to-income ratio can provide you with valuable insight into just how effectively you are managing your ongoing financial situation.
As it turns out, I would have to say that our debt-to-income ratio, is not in as bad of shape as I had feared going into this process. While we definitely do have some work to do to pay off some of our debts, the balance we have maintained between our income and debt levels so far, is not out of control. With this new information, I plan to work even more vigilantly to ensure our debts do not far exceed our income, so that we will have the best financial future possible.
