If you feel like your money does not go as far nowadays as it used to go, you certainly are not alone. In fact, the cost of everyday items has increased more in the last year than it has in any year since the economic collapse of 2008. To make ends meet, you may have little choice but to reach for your credit cards or take out a personal loan.
Consumer debt can sneak up on you fast. While there may be nothing wrong with having some revolving debt, too much can sink your credit score or make it difficult to secure financing for a new home. Calculating your debt-to-income ratio is one way to know whether you have too much debt.
Add up your monthly expenses
The first step in calculating your debt-to-income ratio is to add up your monthly expenses. These include everything you past pay each month, such as the following:
- Mortgage and rent payments
- Spousal and child support payments
- Student loans
- Car loans
- Payday loan payments
- Credit card payments
- Other monthly debts
Find your gross monthly income
Next, you must determine your gross monthly income. This is simply the amount of money you earn each month before your explorer takes deductions. Usually, your gross monthly income appears on the paystubs your employer gives you with your paycheck.
Divide the two
Finally, you must divide your total monthly expenses by your gross monthly income. This gives you your debt-to-income ratio. Generally, keeping your debt-to-income ratio below 30% is an effective way both to maintain a good credit score and to avoid accumulating too much debt.
While many measures may help you track your debt, your debt-to-income ratio gives you a snapshot of how much debt you have relative to your monthly income. Ultimately, regularly calculating your debt-to-income ratio may tell you whether you should explore bankruptcy or other types of debt relief.