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Now is a good time to calculate your debt-to-income ratio

On Behalf of | Jan 28, 2021 | Bankruptcy

The first couple months of any new year is a good time to review personal financial information and plan for the upcoming months. If you are struggling to pay everyday expenses or unexpected ones, you may have too much debt relative to your income.

Your debt-to-income ratio simply compares your financial obligations to the amount of money you make. If you have not calculated your debt-to-income ratio ever or in some time, you may want to do so today.

Gather relevant information

Before you can determine your debt-to-income ratio, you must gather some information about your outstanding debts. Essentially, you need to know how much you spend on housing, utilities, credit card bills and all other necessary expenses every month.

Then, you need to know your gross monthly income. This figure, which probably appears on your regular paystubs, is simply the amount of money you earn each month before taxes.

Do some simple math

After adding together your monthly expenses, divide the sum by your gross monthly income. Then, multiply by 100 to express your debt-to-income ratio as a percentage. For example, if you have monthly debt of $3,000 and income of $6,000, your debt-to-income ratio would be 50%.

Understand the meaning of the ratio

While many financial planners disagree about the optimal debt-to-income ratio Americans should have, most advise keeping it below 33%. The U.S. Consumer Financial Protection Bureau says any ratio above 43% may complicate financing a home.

Ultimately, the right debt-to-income ratio for you probably depends on many factors. Still, if your ratio is too high, exploring bankruptcy or other options may help you secure a better financial future.