One way to track down how you are currently dealing with your financial situation is to know your income and the debt you have. Of course, it is much better if your income and your financial assets are greater than your debt and credit status. So how would you know if the income you have is good enough than the amount of liability to you have. This is where the debt ratio formula comes in. This formula will give you a quick calculation on your financial status. Knowing your debt ratio will help you to decide on financial expenses that will come in the future. Most lenders use this debt to income ratio so they will know if they debtors have the capacity to pay them. Generally, you can get your debt ratio by dividing your total liability from your total assets. Here are the steps you can follow to compute for your debt to income ratio formula.
- Add up all your monthly income. This can include your salary, overtime pay, extra income and other sources of your income. If you have varying income every month, get the average and use it as your net monthly income.
- The next steps should be to compute and add all the debts you need to pay every month. This will include your credit card bills, other utility bill, loans and mortgages that you have to pay each month. If you are paying for a house or an apartment rent, do not forget to take account of them.
- Now that you already have your total income and your total monthly debt obligations, the following step is to divide these two figures. The number that you will get from here will be your debt to income ratio.
What is the meaning, then, of the ratio that you get? If you are able to achieve a very low number from the formula, then you are doing well so far with your financial statue. This only means that you have less debt comparative to the income you have. This would mean that you have extra money to allot for other expenses. If you were planning for loan or a large expenditure, it would be easier for you to have an approval because you have a low debt ratio.
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