Debt to Income
A coworker of mine isn’t quite buying into the whole “eliminate all your debts so you can easily afford to fund you retirement plans and build wealth” idea. So we we’re discussing what is a manageable amount of debt if you’re not going to suck it up, focus, and go all the way and instead take a more half-assed approach and just sort of eliminate some of your debts (most likely temporarily though). I decided that I would look into the numbers for him anyway because any money discussion can be a good discussion for most and it can’t hurt to get a better idea of what many feel is normal debt (well broke people call it normal).
After a fair amount of un-reliable research on personal Debt to Income ratios here are some numbers I came up with – remember your home mortgage payment is also included in these numbers, no cheating here
45% or higher debt to income – Things are scary (you probably already knew that). You are walking too close to the edge and some drastic measures should be taken to address the issue.
35% to 45% debt to income - You’re still walking close to the edge but not quite as close as above. Don’t slip up here though since you likely have no cash cushion you’re one mis-step away from stumbling into serious trouble. Now is the time to make some changes while you still have a little breathing room.
30% to 35% debt to income - You’re probably feeling like you’re in pretty good control of things compared to your peers and lucky you they’re offering to help you run up debt as fast as they can get the offers into your mailbox. This area is manageable and should allow you to fund retirement at a reasonable level (especially with employer matches in place)
30% of below debt to income – Below 30% you looking solid! This means you pay 30% or less on your debts each year. You could save 15% towards retirement, pay all your debt payments and still have 45% of your money for all your other junk.
So take minute, pull up your little list you created here: No shortcuts here, now let’s calculate you debt to income ratio. For the steps to do this read check out Calculate your Debt to Income Ratio and see where you stand. This should help you plan your next steps accordingly, remember the more information you have to work with the better decisions you can make.
...."so when I got home we had a talk and decided this money situation had to change. I didn’t know how I was going to change it, we were barely making enough money to cover the monthly payments so how the H-E-double-hockey-sticks was I going to fix it?"