Your debt-to-income ratio reflects your true financial situation

Do you know what a debt to personal disposable income ratio is? Do you know how to calculate yours? Do you know what your ratio is?

Personal disposal income is the amount of money you have left over after you've paid your income taxes and social security contributions. The debt-to-income ratio is a unit of measurement that compares your total disposable income to your debt total. In a nutshell, it tells you what percentage of your monthly gross income goes toward paying off debts. And it is used in the lending industry to give financial institutions an idea of your repayment ability.

A simple way to calculate it is to add up all your recurring debt (mortage/rent, home insurance, taxes, car payments, credit cards, student loan, etc.) and divide the total by the sum of your gross monthly revenue, including any monthly investment income you may have. Note that non-debt expenses such as food and utilities are not included. However, it is a good idea to also know the total amount of these expenses to stay on top of your budget.

Anything less than 30% is excellent, 30-36% is good. Anything above 40% may make it difficult for you to secure a car loan, student loan, mortgage and to make your payments. Unlike credit scores that only show your payment history, debt-to-income ratios take into consideration your current income.

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