Debt Reduction – Taking a Look at Your Debt to Income Ratio

One of the main reasons why many Americans look to bankruptcy and other measures of debt reduction to clear their debt is because statistically as a country we have a very high debt to income ratio; sometimes well above 50% per household. This ratio can prevent people from obtaining financing, establishing credit, and can also get you in a major bind with many of your own creditors. You can calculate this ratio by taking the percentage of the debt you have versus how much income you bring home.

Before any loan is approved, your DTI is calculated. This calculation is run because if your DTI is too high, you run the risk of not being able to pay your creditors each month and therefore you will be prevented from adding any additional debt; a person with a high DTI is a high risk consumer.

First take your monthly income; this should include all wages, child support, alimony, annuities, or any other monies that come in to the household monthly. If you happen to have income that varies, you will need to add up the most recent 6 months of wages and get an average of your standard income.

Next, you will have to calculate all your debt; this includes the payments you make monthly on all outstanding balances. Do not include your utility bills, just your credit cards, car payment, mortgage, child support, personal loans, and any business loans. If you know that any of these balances will be paid off within 3 months, do not include it. Lastly, divide your monthly expenses by the monthly income and you will calculate your debt to income ratio.

Example:

The next thing to be calculated is the debt you have incurred. Debt does not include any utility bills, but it will include credit card balances, mortgage, child support, business loans, personal loans, the car payment, etc. Do not include it if it will be paid off within three months.

Finally, go ahead and divide your monthly expenses by the your monthly income. This will give you the debt to income ratio.

Example:

Monthly Income = $3500

Your Monthly Income = $4000
Fixed Monthly Expenses = $2,300

DTI = 49%

This debt to income ratio is very poor and shows that expenses are so high that it would be very difficult to gain any additional credit or financing.

The first step of debt reduction is always taking a look at where you currently stand, and that is through obtaining your debt to income ratio.

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Debt Reduction Schedule

Have you been feeling like this situation you find yourself in financially is a tidal wave that continues to build and build, and you can’t stem the tide no matter what you do? That’s not an uncommon feeling for people whose financial lives have gotten away from them. A debt reduction schedule can absolutely be a way that people who feel like their lives have gotten out of control can regain control.

Just like a diet, a debt reduction schedule will help you know every single day exactly what you are supposed to be doing to improve your situation. The important part, is that you stick to it. No plan or schedule is any good if you don’t stick to it.

The first thing you’re going to need to do is make a list of all your bills by getting them together in one place and putting them onto a spreadsheet.

Your principal balances need to be paid down, so it’s important that you know how much is going out on minimum payments every month versus how much you are bringing in. This is the only way that you’ll know how much you have available to pay down on your balances.

If you plan on paying only your minimum payments every month, then you are basically planning on never getting out of debt. Your minimum payments will never get you out of debt, they are actually designed to keep you paying fees for years and years on end.

The next part is the tough part. This is the part that is going to require you to exhibit some strength of will. For this part you need to come up with a plan of exactly how much you will pay down on exactly which bills each month, here is the difficult part, stick to it.

Just like you need to sacrifice sugar and calories when you are on a diet, chances are you are going to need to fore go some extras on your new financial diet. Less eating out, less expensive entertainment.

Living life on a debt reduction schedule can be one of the most rewarding things you are at we will ever do, if you want it enough and are willing to make the necessary changes.

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