Finance Friday Series: Know Your Debt-to-Income Ratio
Do you know your debt-to-income ratio? If not, do you know how to figure out what it is? It is fairly easy to find your debt-to-income ratio. Simply add up all your debt (this includes mortgage or rent payments as well as loans or credit cards) and divide that total by your gross income.
As a rule of thumb, you want to keep your total monthly debt payments under 35-40% of your gross income. For example:
- Gross Income = $40,000
- $40,000 x 40% = $16,000 maximum debt payments each year
- $16,000 / 12 = $1,333 debt payments per month
Of course, the less debt you have relative to your income, the better off you are financially.