Your debt-to-income ratio is the percentage of your monthly income that goes towards paying your debts. It’s an important number to know because it can help you understand your financial health and determine whether you can afford to take on new debt.
To calculate your debt-to-income ratio, you’ll need to gather two pieces of information: your monthly income and your monthly debt payments.
Your monthly income can come from a variety of sources, including your wages, salaries, tips, commissions, alimony, child support, and Social Security benefits. If you’re self-employed, your monthly income includes your net profit from your business.
Your monthly debt payments include all of the payments you make on a regular basis, including your mortgage or rent, car loan, student loan, credit card, and any other personal loans you may have.
Once you have your monthly income and debt payments, you can calculate your debt-to-income ratio by dividing your monthly debt payments by your monthly income.
For example, let’s say your monthly income is $3,000 and your monthly debt payments are $600. Your debt-to-income ratio would be 20%.
A debt-to-income ratio of 20% or less is considered healthy. A ratio of 21% to 40% is considered acceptable. A ratio of 41% or higher is considered problematic.
If your debt-to-income ratio is on the high end, you may want to consider taking steps to pay down your debt. This could include making extra payments on your debts, consolidating your debts, or refinancing your loans to get a lower interest rate.
If you’re not sure what your debt-to-income ratio is, you can use a debt-to-income ratio calculator to find out.
