http://www.destroydebt.com/blogs/cucu72.html The Debt Geek (deposits.com) www.destroydebt.com Fri, 14 Nov 2008 11:29:36 GMT webmaster@destroydebt.com webmaster@destroydebt.com http://www.destroydebt.com/blogs/cucu72/314-what-is-a-debt-toincome-ratio-and-why-should-you-care.html http://www.destroydebt.com/blogs/cucu72/314-what-is-a-debt-toincome-ratio-and-why-should-you-care.html Fri, 14 Nov 2008 11:29:36 GMT Like many financial measurements the debt-to-income ratio is really just a number , but understanding what it means will help you better understand (and control) your monthly debt spending. Basically the debt-to-income ratio represents how much of your monthly gross income is being used for debt p...
Basically the debt-to-income ratio represents how much of your monthly gross income is being used for debt payments.  So the lower the number is certainly better. You calculate your debt-to-income ratio by adding up all of your monthly , before taxes, income then divide that number by all of your monthly debt payments. The number is intended to represent your monthly debt load. Living expenses are not part of the calculation so you should not get a false sense of security about your debt-to-income ratio. This is because you could have a great, low, ratio but may be spending too much on eating out every night. Of course this will eventually show up in your ratio in the way of a credit card debt payment. 
 
There is two major reasons you should care about this number. 

(1)  The first, and most obvious, is that you want to make sure that you are not loading yourself to heavily with debt payments. The more of your income you are using up for debt , the less money you have for your living expenses like food, clothing, gas, etc.  If you get into a situation where you need to choose between a debt payment and a living expense (mortgage payment vs food) you will likely choose the living expense (food). Things can get ugly, fast when the debt companies do not get their money.

 (2)  The second reason is that your bank uses this number to calculate how much you can borrow.  When a bank is calculating the amount of a payment you can afford likely there is a debt-to-income ratio behind the scenes guiding them.  Make sure you understand your ratio though as some financial professionals are less concerned with your best interests and may just want to get the sale. Your own financial health is ultimately your own responsibility.

We have said in this post, very generally, that "lower is better" for your debt-to-income ratio. In our next post we will discuss, in more detail, the different ranges for the debt-to-income ratio and what they mean.]]>