Are You Financially Healthy?

Who goes to their family doctor for regulatory blood pressure and general health checks? I think we are all saying "that's me!". But have you thought about your financial health? If you're paying off debt, you want to be aware of something called your debt to income ratio and it provides an overall measure of your financial health. This week's little piece of financial knowledge is all about the debt-to-income ratio. Never heard of it before? That's fine, I will tell you why this is crucial to everyone (including me!) and how to find it. I know, I know, as soon as you see the word 'ratio' you think back to those dreadful math classes during school and you're at your desk counting down the minutes till the lunch bell rings, but this super quick way will take less time than a doctor's check up!

What is a debt-to-income (DTI) ratio?

In simple terms, your DTI ratio is all your monthly debt payments divided by your gross monthly income. In the bigger picture, this is one of the most used way lenders measure your ability to manage the payments you make every month and your ability to repay the money you have borrowed, for example your house mortgage.

Can I calculate it myself?

You absolutely can and definitely should. According to The Consumer Finance Protection Bureau, mortgage loan studies have shown that debt issuers with a higher DTI ratio are subject to higher risk of running into trouble making their required monthly repayments. It is important every now and then, particularly at times when your income is unstable, to reassess your DTI ratio. The Consumer Financial Protection Bureau also outlined that in the majority of cases, a 43% DTI ratio is the highest ratio a borrower can have and still be eligible to issue a qualified mortgage.

Erin Lowry, the author of Broke Millennial said the "DTI ratio is a simple formula. Take your monthly debt obligations divided by your gross monthly income, and multiply that number times 100." Let's take an example and say every month you pay $1,500 for your mortgage, $500 on credit card and your monthly gross income is $5,000. Your total monthly debt payments sum up to $2,000 and with a gross monthly income of $5,000, your DTI ratio ($2,000/$5,000)*100%=40 per cent.

Now you may be asking, what is the 'ideal' DTI ratio? Ideally, you want your DTI ratio to be somewhere between 36-40%. This although is a conservative benchmark, but ensures you are not financially anxious or stressed and that your dream family home is not becoming a burden. In the end of the day, it comes down to what you are comfortable with! You may even wish to aim for a zero per cent DTI ratio if your goal is to be debt free!