With the economy all over the place at the moment, it’s harder than ever to stay out of debt. As soon as that sweet pay cheque enters our bank accounts, the money seems to slip between our fingers. Debt payments and living requirements need to be covered by your income, and often, the numbers don’t match. Calculating your debt to income ratio acts like a financial litmus test, so you know if you’re completely out of your depth.
By no means will this calculation be accurately indicative of your fiscal situation, but it will give you a rough idea of where to go next. Having a plan is crucial to managing your finances. Calculating your net worth is another way to ascertain where you stand. You can do this by adding up your assets and then offsetting them against your liabilities. Obviously, if you end up with a positive number then you have more assets than liabilities.
Lenders and Debt to Income Calculation
Lenders often use some form of debt to income calculator to establish whether they will grant you a loan. Beat them to it by using IVA Expert’s online calculator: http://www.iva-expert.co.uk/debt-calculator.asp. It’s as easy as adding up all your debt and subtracting it from your income. To get the best indication of where you’re at, include everything, like mortgage premiums, car payments, credit card payments, student loans, child support, and any other debts you may have.
When you’ve added up your debt total, calculate your monthly income. Divide your annual salary, plus any yearly bonuses, by twelve. If you have additional income, through a side business or a hobby, include this too.
Finally, take your total debt payment number and divide it by your total monthly income – and there you go! That’s your debt to income ratio.
What Does This Number Mean?
You want this number to be exceptionally low, so you have money to spend on the things you enjoy. Lenders look at the front ratio, which is the debt to income ratio, including house costs. They also look at the back ratio, which considers your non-mortgage debt to income ratio. For an idea of what lenders are looking for: they like your front ratio at a maximum of 36% and your back ratio at 28%.
Obviously there will be a wide variety of other factors that will be accounted for, but this gives you a rough idea of what financial position you are in. Playing around with these numbers shows you where you are fiscally weak and where to improve your financial standing, especially if you choose to borrow money for any reason.
Before you move forward with your financial plans, you may have to deal with the quantity of debt you have on your hands. Waiting until you are financial stable is a good way to approach lenders without negatively affecting your credit rating. You may have to postpone big plans for the time being.
This article was contributed by Lloyd on behalf of IVA Expert.