What Is Debt-To-Income Ratio?
It's hard to know whether you're doing a good job at curbing your debt, if you could do better, or if you could do A LOT better. The best way to do that is to determine your Debt-to-Income (DTI) ratios for your consumer debts (auto loans, student loans, credit cards, etc.), housing debt, and total debt. Let's assess it all now.
Calculating Your Consumer DTI
This includes all monthly debt payments — everything but your mortgage or rent — divided by your monthly income after taxes. Below 20% is ideal.
Calculating Your Housing DTI
Your monthly housing payment divided by your pre-tax income. You want it to be under 28%.
Calculating Your Total DTI
Combine your total monthly debt with your housing payments and divide by your pre-tax income. Under 36% is best.
Click here to download the DTI worksheet.
So, now you know
If you're above any of your DTIs, this is your chance to do something about it before it becomes a real financial strain. If you're within your DTIs, good job! Keep it up!
NOTE: These ratios are only general rules of thumb, and keeping your debt levels within them is not guaranteed to provide financial success. You also shouldn’t you feel compelled to incur debt up to these levels. Debt is definitely a case where less is more!