What is your debt to income ratio?
The famous saying by Charles Dickens’s character, Mr Micawber, is as true today as when first published in 1850. Your financial wellness involves an intricate balancing act between the amount of money coming in and the amount going out. A good starting point to help you control your finances is to calculate your Debt to Income Ratio (DTI).
To do this, calculate your total monthly recurring debts (mortgage, loans, credit card payments, child support payments) and divide this figure by your total (gross) monthly income. For example, if you earn £2000 gross per month, and have recurring debts that add up to £700, your DTI is 0.35, or 35%. The optimum outcome is a ratio score of 36% or less. Anything higher is considered a poor risk by mortgage lenders, and is a useful tool for anyone to keep a check on their own financial wellbeing.
According to Dominik Lipnicki of www.yourmortgagedecisions.com, ‘Getting into the habit of regularly checking your DTI works wonders for your finances. You’re far more likely to balance the books if you keep an honest record of your monthly outgoings. Make sure you keep on top of rates and use comparison sites to switch providers to keep your DTI down. While keeping an eye on your DTI, it is also vital that you do not lose sight of what you owe, as you will need to have a clear and achievable strategy to pay your debt off, even if rates increase or your income drops in the future.
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