Give Your Debts a Financial Health Check

A debt-to-income ratio is a measure of financial stability calculated by dividing monthly minimum debt payments by monthly gross income. This calculation gives a straightforward depiction of your financial position. Typically, the lower your ratio, the better handle you have on debt.

Determining your debt

* Collect your most recent credit billing statements for current balances
* Outline your total monthly bills using two columns: bill type (such as car loan, mortgage/rent payments, and so on) and monthly payment. Do not include bills such as taxes and utilities in this list.

* Add up the total for all of the monthly payments listed.

* Calculate your monthly before-tax income. If you receive a paycheck every other week, as opposed to twice a month, your monthly gross income is your before-tax income from one paycheck times 2.17.

* Your monthly debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly income. For example, someone with a monthly income of $2,000 who is making monthly payments of $500 on loans and credit cards has a debt-to-income ratio of 25% ($500 / $2,000 = .25 or 25%).

Staying aware of your ratio can help avoid debt reaching a problematic stage.
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