One of the personal-finance metrics to help you with your debts is the debt-to-income ratio (DTI). It compares your total debt to your gross income.
To get your debt-to-income ratio, you must divide your total recurring monthly debt by your gross monthly income. There is a reason why you need this specific number.
Because debt lenders use this metric to understand your capabilities to repay the money you own or make sure you can pay the additional debt should you want to take it as a mortgage?
It’s also a useful statistic to know personally for your finances when you need to decide on whether you should make that big purchase or not.
This article will seek to discover how to calculate your debt-to-income ratio and learn more about it.
How do you Calculate Debt-to-Income?
The first thing that you need to do to start the process is to add up all of your regular monthly bills to get your debt-to-income ratio.
Aside from your mortgage, additional recurrent obligations may include any loans, such as student or vehicle loans, credit card payments, or other debt that you have to pay every month.
Following that, you must estimate your gross income before taxes.
Your salary, tips, pension, child support, or any other form of income that comes into your bank account.
After learning about these numbers, then you need to divide your entire monthly recurring debt by your pre-tax gross monthly income.
The number you get will be a decimal, which then you have to multiply by 100 in order to get the percentage of your debt-to-income ratio.
How does it Help your Finances?
If you have a plan to make a massive purchase financially, you should include that new purchase in your calculations while calculating your debt-to-income ratio because any lender who is taking a look at your application will also consider it.
You have the freedom to use a calculator online to determine the payment you need to make for your monthly mortgage payment or a new car financing loan.
By comparing your finances’ before and after ratios, you can easily assess if you can afford that new home or automobile right now.
That is how the debt-to-income ratio helps you and your finances.
Debt-to-income ratio is actually a vital ratio that every household must know about because nowadays, everyone has some debt one way or another, and not knowing much debt you have compared to your income is dangerously risky as it might put you in bankruptcy with some wrong extra debts that you take on.
That is why you need to always calculate your debt-to-income ratio before making a decision about a purchase, whether big or small.
You can easily calculate this ratio without any external help; all you need to know is all of your debts and gross income before tax.
Once you know these, you can calculate them in seconds.
Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.